Starting a business is an exciting venture for most people. Many people open businesses based on their own skill set and wanting to provide a service to customers which is in high demand. Most common ones include freelancers, entrepreneurs, tradespeople, and retail and service providers. All of these are known as Self - Employed individuals or Sole Traders. This essentially means that they are the sole owner of the business. As sole owners, they will have total control over the assets and profit of the business. They will be liable for any debts in the business and will pay income tax on business profits.
The pros with starting this type of business is its simplicity. There is no distinction between yourself as the sole trader and your business. Therefore, there will be fewer legal and financial requirements as the accounts will not be made public. It is much easier to run and get started on a smaller scale. The owner also has complete decision control on business decisions and keeps all the profits for themselves.
The major disadvantage with starting this type of business is there is unlimited liability involved. This basically means that the owners are personally responsible for any debts of the business. Personal assets such as your home or car could be at risk if you fail to clear the business debt. Having a sole trader business is also seen as less prestigious compared to a limited company. Some customers or suppliers may see it as less established or less stable compared to larger companies which could impact the sole trader's ability to attract business. There are also fewer opportunities for tax planning compared to limited companies. For example, sole traders cannot draw dividends which carry a lower tax charge. There are also limited funding options as some forms of finance require a business to issue shares which would require restructuring to a limited company.
Of course starting a sole trading business is stressful and time consuming. You are essentially responsible for all aspects of the business from sales and marketing to accounting and administration. You always have the option to convert it to a limited company. It is best to consult your accountant in such cases.
Being a sole trader means you will have to complete an annual Self-Assessment tax return detailing income and business expenses. You will then need to pay Income Tax and NICs. You must inform HMRC that you are self-employed by registering for Self-Assessment by 5th October following the end of the tax year in which you started trading. You will then need to submit annually and pay Income tax and NICs by 31st January following the end of the tax year. Also depending on your gross qualifying income, you may need submit quarterly updates via Making Tax Digital (MTD). As a sole trader, you will have an annual tax-free exemption of £1,000 on gross self-employment or casual income. However, you must register for Self-Assessment by 5th October following the end of the tax year in which you started trading if your self-employed income is more than £1,000.
Of course there a pros and cons when starting a sole trader business. It can leave a lot of confusion, and you may end up questioning whether you should have started off as a limited company. A rule of thumb would be to convert your sole trading business to a limited company when your annual business profits reach around £25-£30k as it may be more tax efficient.
If you would like some guidance or would like to start a sole trading business of your own, please get in touch with us today on 07543 750 467.
With nearly 20 years experience in the Finance & Accounting sector, I have founded a practice known as Paradox Accountancy Limited which provides affordable accounting solutions for individuals, sole…
