A Sole Trader, also known as Sole Proprietorship, is a business which is both owned and run by a single individual.
The owner takes on the full responsibility of every aspect of the business including all debts and losses which may occur but the owner also has full entitlement to all profits.
The government does not distinguish between the business and its owner where a Sole Trader is concerned and sees the Sole Trader as a single entity.
This bodes well for the owner as it means they will only have to pay tax on personal income and not on corporate income as a corporation would. However, some owners may find they are charged at a higher rate of personal tax but will have the benefit of being able to deduct all their business expenses from that tax.
Advantages and Disadvantages of being a Sole Trader
- Sole Traders will not be required to file Self-Assessment Corporation Tax Returns, annual accounts or an Annual Return meaning far less administration is necessary. However, a Sole Trader will be required to file an annual Self-Assessment Tax Return and make arrangements for National Insurance contributions to made
- A Sole Trader will need to register as self employed with HM Revenue and Customs but will not be required to register the business with Companies House
- A Sole Trader will also not have to register their business name
- A sole Trader can still take on employees without affecting their Sole Trading status and can register for VAT
- A Sole Trader has the option of changing to a limited company at any point in time
- Financial institutions are more reluctant to lend to Sole Traders making it very difficult for the Sole Trader to borrow if they need to
- Because a Sole Trader’s business name is not registered with Companies House that name will not be reserved for the business which may cause problems at a later date should the Sole Trader decide to change to a limited company and keep the original business name
- The fact that Sole Trader’s businesses are generally a relatively small enterprise may be off putting to prospective customers or clients who tend to see security in size
- A Sole Trader is personally liable for all debts that the business accrues and should the business get into ‘hot water’ a Sole Trader’s personal possessions and property could be seized to cover those debts
- Some particular trades may require the Sole Trader to apply for a licence
- The Sole Trader will need to take out insurance cover for the business, public liability insurance and employer liability insurance