Operating as a sole trader does exactly what it says on the tin – you are running your business as an individual and there is no legal distinction between you as the owner and the business itself.
It’s the most popular way of starting a business in the UK, so let’s look at some of the reasons why that is:
8 sole trader benefits to consider
1. It’s quick and easy to get started
Setting up as a sole trader is the quickest and simplest way of working for yourself, with no need to register a company at Companies House. All you need to do to get started as a sole trader business is tell HMRC that you are self-employed.
2. You are in control
As a sole trader you are 100% in the driver’s seat of your business. With no other directors, shareholders or partners to answer to, you don’t have to compromise on your strategy or vision for the business.
3. You can be totally flexible
Flexibility goes hand in hand with control. Being the sole decision maker gives you the agility to react quickly to adapt to changing circumstances, such as fluctuations in customer demand and needs.
4. There are fewer statutory obligations
Being a sole trader comes with considerably fewer obligations and paperwork than running a limited company, with no need for formal annual accounts or a corporation tax return and no Companies House responsibilities. However you will need to submit a self-assessment tax return which shows your profit and loss and balance sheet – so you will still need to keep the books.
5. Accounting is simpler
Although you still need to keep records of invoices and expenses for your tax return, the accounts of a sole trader business are simpler than that of a limited company. As your affairs are simpler, this may mean lower accounting fees.
6. Financial upsides
As a sole trader you retain all the profits from your business. In addition to this you can offset any trading losses against your personal tax bill, going back up to 3 years.
Another financial benefit is that you may retain personal ownership of assets used by the business – although this also means that any liabilities are also yours.
7. Your privacy is assured
When you run a limited company, Companies House information is publicly available, so anyone can see details of you as a director and access your accounts to see how your business is doing (although if you are a small business the amount of publicly available information can be very limited). As a sole trader none of that information is in the public domain.
8. It’s simple to shut up shop
With a limited company there are formal steps for winding up and dissolving the business and this can be a lengthy process. With a sole trader you can simply cease trading as and when you want to (although you will still need to include the final figures in your self-assessment tax return).
Is being a sole trader right for you?
Just like any other type of business structure, being a sole trader has its downsides.
Notably, sole traders have unlimited liability and you and the business are one and the same. This means, if the business fails, your home and personal assets could be at risk.
You should always weigh up the pros and cons of what is right for your business.
Sole trader FAQs
Can you employ someone if you are a sole trader?
Although sole traders operate the business by themselves, it doesn’t mean they have to work alone. As a sole trader you can employ staff but you must ensure you meet all the legal obligations of doing so.
What are the risks of being a sole trader?
Far and away the biggest risk faced by sole traders is the fact that your business finances are not separate from your personal finances, so you have unlimited liability. As well as this some clients may only deal with limited companies, so you may risk losing out on work if you are a sole trader.
What is a sole trader responsible for?
Although working as a sole trader comes with fewer responsibilities than setting up and running a limited company, there are some. You must inform HMRC that you are self-employed and register for self-assessment. You will also have to pay self-employed national insurance contributions and register for VAT if you reach the registration threshold.