Thinking to set up your own business in the U.K? Then, becoming a sole traderor a sole proprietor in the U.K could be the best option for you.
The one who has complete control of the business in his/her own hands and are responsible for the way a business operates.
Being the owner of all the business assets and any profits generated by the business itself, the sole trader also has the responsibility for all the debts and liabilities their business incurs. Do you know sole trader is supposed to be registered as self-employed with HMRC? Yes, you have heard that right, besides being registered with HMRC they too have to submit an annual self-assessment, but overall their accounting requirements are less burdensome as compared to a limited company.
Whether a sole trader, a limited company or a partnership firm, each one has its own pros and cons. When it comes to a sole trader, let’s see in detail what advantages and disadvantages it has in store:
The sole trader also referred to as a self-employed is a lucrative form of business structure that is easy to set-up and has full control comes with a certain form of advantages:
Being a sole trader has certain advantages, one of which is you can be your own boss and can specify the direction of running your business. It will be your wish to run your business the way you want. This is why many people quit their employment to start their own business. A sole trader enjoys the freedom with decision-making as compared to partnership structure wherein business partners make joint decisions and share the ownership and the business direction.
Besides all the benefit of being a sole trader, one of which is that you can retain all the profits after tax on your business. If you were operating in a partnership firm or a limited company, then you would have to share the profits amongst your partners as per partnership agreement and for the latter with investors/shareholders.
Setting up your business as a sole trader is very much simple and direct as compared to setting up a limited company. You need to inform the HMRC and register as self-employed if your earnings exceed £1,000 from 6th April to the 5th April of the following year. Always remember, this value may change over a period of time. Registering with HMRC is easier as you can do by filling an online form.
Do you know starting-up a sole trader business all comes for free? Isn’t a great news? Well, yes, as registering with HMRC is free so there is no need for shelling out any costs for setting-up your sole trader business. On the other hand, if you were starting a limited company you need to pay to Companies House in order to form your own limited company. Therefore, if you are setting up a business, subject to what it is, you may have to incur lower start-up costs. This should not be a big deal for you.
As a sole trader business, there is no requirement for your business to get registered with Companies house which means all your business affairs are private. On the other hand, if you were to start a limited company, you have to register with Companies House and disclose all the information which then goes on public record. A limited company owner will have to disclose all the business details like details of the director and shareholders which need not be the case for a sole trader business.
Running your business as a sole trader in small size doesn’t restrict you in expanding it later on. You can easily change your business structure if you want to do so. For instance, if your business sees an increase in its income, you may find it worthy for tax-efficient purposes in order to start running your business as a limited company. This process is easier, not a complicated one, which allows you to access more future opportunities.
Besides numerous advantages of a sole trader for being a popular business structure across U.K, it has some drawbacks too.
Sole trader and his/her business will be seen as one entity as compared to a limited company wherein these two are seen as two different entities. A sole trader has an unlimited liability for his/her business which means any business actions and the debts are entirely the responsibility of the owner itself. There is no safety for personal finances and assets, therefore, being a sole trader can prove to be more financially risky.
A sole trader has less flexibility to work around the tax system wherein a sole trader has a tax-free personal allowance of £11,850 (2018/19) and when taxes have to be paid on any further incomes as follows:
The basic tax rate has to be paid at 20% if the earning goes between £0 and £34,500.
The higher tax rate is 40% on income from £34,510 to £150,000 and the additional tax rate is 45% on income exceeding £150,000.
The more tax rates can be seen here.
Sole trader means that you will be only working for yourself. This makes it difficult to take time out and away from your business, whilst it’s necessary to do so. It can be complex to take breaks, however, it’s impossible. You need to sort out and organize by planning your schedule time in for a break.
Whilst the decision making is viewed as a positive aspect as you have all the control of directing the business and goals in your own hands, it can be a daunting possibility which can put you to stress. When the entire business is dependent on an individual’s actions and decisions, it can really be taxing, and sometimes result in poor decisions.
Sole traders don’t have that reputation which limited companies have. This reputation can help in attracting investors and clients and creates a professional image of the business. It is difficult for a sole trader to create that big business image which limited companies have.
It is difficult for sole traders to secure funding from traditional sources such as banks as compared to other business structures. And this makes sole trader a riskier business. Raising funds for a sole trader business is really very difficult. Therefore, entrepreneurs need to weight up the options available to them and decide if they find another funding method or prefer changing their business structure. Whilst, it’s worth denoting that sole traders often have low start-up costs that require minimum financing.