ADVANTAGES & DISADVANTAGES OF BEING A SOLE TRADER IN THE UK

Due to its ease of setup and many benefits, the sole trader structure is prevalent. Sole traders are self-employed, and this is the preferred structure for most start-ups and freelancers.

If you are thinking about opening your own business, you might consider becoming a sole trader. A sole trader, also known as "sole proprietor," is one type of business used in the UK. Because it is easy to set up, this form is the most popular as there are downfalls, and we all must be aware of such declines.

The self-employment trend is not slowing down, and many people who embark on the self-employment journey choose to work as sole traders, which seems more convenient than working in limited companies.

SOLE TRADER AS A BUSINESS

The sole proprietor has complete authority over the management and operation. They also own all assets and profits earned by the sole proprietor and are responsible for all business liabilities and debts. A sole trader must register with HM Revenue & Customs as self-employed. They will be required to submit an annual self-assessment, but the accounting requirements for limited businesses are more straightforward.

The business can also be classified as a micro-business or small business because it has only one owner.

Plumbers, electricians, and plasterers are all sole traders. These sole traders are traditional and easy to manage. These businesses have focused upon word-of-mouth advertising and domestic household work. Others have set up limited companies, which regulate under IR35 legislation. It is a brilliant idea to seek professional advice before making significant decisions about your life.

SOLE TRADER OR SOLE PROPRIETORSHIP

As we have already mentioned, a sole trader is a person who owns and controls the business. Solo traders are self-employed individuals who own and manage their business as an individual.

Although there are many options for business structures, none of them is superior to any other. It all depends on your situation and how you run your business. As sole trader accountants, people asked us what "sole trader" is and if it is the proper structure for their business.

A sole trader is the owner and operator of a business, which means that the company and business owner are legally not separated, having both benefits and disadvantages. For example, HMRC might require you to register for self-assessment. Keep accurate financial records, pay taxes, and keep authentic financial documents: track eligible expenses and issue invoices. You can become a sole trader by reading this article. As we bring few benefits and drawbacks of being a sole trader in the UK.

ADVANTAGES OF BEING A SOLE TRADER

1. CONTROL

You are the sole owner of your company and have complete control. Simply put, you can make all decisions. You may have become self-employed or are considering making the transition. So that you can work as you please. Being a sole trader allows you to focus on your business and manage it as you wish.

2. OWNERSHIP OF YOUR FINANCES

Because there are no other owners to share the profits, all that a sole trader makes after taxes and expenses is theirs even profits after taxes, which means that if they work independently, they can maximise the profit potential and keep costs low. They will need to share the profits of their business if they decide to form a partnership.

3. EASE IN SETTING UP YOUR BUSINESS

You do not need to register your sole trader business with Companies House. It is not entirely a separate legal entity like a limited company. As a result, some traders can start immediately.

Many people choose to be sole traders because it is easy to set everything up. First, you need to notify HMRC that you are self-employed and register for self-assessment. Then afterward, you can trade immediately, except for any industry-specific licenses you might need. Companies House does not require you to register if your company is not established yet. However, it would be best to consider a few things when choosing a business name for a sole trader.

4. SIMPLE REGISTRATION

After starting a business, sole traders must register as self-employed to be tax compliant. This is because you are effectively telling HMRC that you expect your Income Tax via Self-Assessment Tax Return.

It is easy to register, and you do not necessarily have to do it when you become self-employed.

5. LOW START-UP COSTS

HMRC registration is free. So, registering as a sole trader with HMRC does not cost anything. However, if you wanted to create a limited company, you would need to pay Companies House. You may find that the sole trader option is more cost-effective if you are starting a business. Your start-up costs as a sole trader are not highly expensive, if any. Even better, your annual accounting obligations are minimal, so you can keep overheads low for those just starting.

6. YOU ARE YOUR BOSS

You can take decisions on your own and adjust quickly to the business to adjust to changes. You can, for instance, change your pricing structure, add new products, or remove products you do not trust. Thus, a sole trader can have a significant advantage in a highly competitive market changing quickly.

A sole trader is not only the sole decision-maker but also close to customers. As a result, sole traders can be sensitive to clients' needs and attuned to their requirements, responding quickly and decisively.

7. SIMPLIFIED ACCOUNTING

Sole traders have a more straightforward accounting process than limited businesses. There is no need to file Annual Accounts or a Corporation tax return. However, you will need to keep records of expenses and invoices. In addition, you must file a self-assessment tax return for sole traders. This will detail the profits you have made from trading. Your personal tax accountant might charge less if there is less accounting work than if you had a limited company.

8. PRIVACY

Your accounts and details about directors are accessible on the Companies House website if you are a limited company. Anyone can search this database to find your business details. HMRC's taxpayer confidentiality rules grant you privacy, but only sole traders can access the database. You and your business information will not be made public so that your competitors cannot access your private information.

9. FLEXIBLE BUSINESS STRUCTURE

If you decide to change your mind or no longer wish to work as a sole proprietor, you can incorporate your business. However, it is difficult to transition from operating as a limited business to being a sole trader. You would need to go through the dissolution process and step down as director.

You can register as a limited business if you feel you are more suited to it. However, you will need to complete more paperwork and pay more tax. You can also get started as a sole trader and get into self-employment quickly before you decide that this is the right path for you. Finally, if you feel that self-employment is right for you, you can become the director of your limited company.

DISADVANTAGES OF BEING A SOLE TRADER

1. FULL FINANCIAL LIABILITY

You and your business will be treated as one entity if you choose the sole trader structure. This allows you to have unlimited liability for the business. However, a limited company and its owner are considered two separate entities. Since they are essentially the same person, a sole trader, and the business is one entity, the owner is responsible for all business actions and debts. Therefore, sole traders are not protected from the loss of assets and finances to be riskier financially.

2. DIFFICULT TO SECURE FINANCE

Solo traders are riskier than other business structures and less likely to be funded by banks. As a result, fundraising for a sole trader can be challenging. Entrepreneurs need to look at all options before deciding if they have other funding options. Note that sole traders usually have lower start-up costs and require less funding.

3. COMPLETE RESPONSIBILITY OF OWNERSHIP

One of the advantages is to have complete control, but it can also come with a cost. You must make all business decisions. This means that your business's success or failure will depend entirely on your actions. This can cause stress for some people, particularly if you have outstanding debts or critical strategic decisions that could impact your business.

It means you are accountable and responsible for everything. Of course, many self-employed people want this, which is often true for those who own their limited company.

4. TAX, VAT, AND NIC LIABILITY

Solo traders must still correctly account for all sales and expenses yearly to meet income tax and National Insurance obligations. If the turnover exceeds HMRC's limit, VAT rules will still apply.

As we have already mentioned, sole traders are exempt from the company's liability. However, the business may have to sell personal assets, such as their home, to meet creditors' demands if it cannot pay them.

Because they maximise income and minimise tax, limited companies can be more tax-efficient than sole traders. Solo traders are treated the same as individuals in terms of tax and have a £12,500 personal allowance that is tax-free for the 2019/2020 year. Income exceeding this amount, you start paying tax at 20% for payment between £12,500 to £37.500, 40% for income between £37.501 and £150,000, and 45 percent for income above £150,000. You might also be required to contribute to National Insurance.

CONCLUSION

There are many advantages and disadvantages to being a sole trader in the UK. It is up to you to decide if it is right for you. This will depend on what type of business you want. Many people choose to start a limited business instead of working as sole traders.

This can be done for so many reasons, but the most important thing is that you have the proper operating structure for your business. Book a free consultation to learn how Naseems Accountants can help with your finances and tax responsibilities as a sole proprietor.