What is a sole trader?
Sole trader is the simplest type of business ownership. You’re solely responsible for your business, so you make all the decisions and take home all the profits (after tax). But there’s no legal distinction between you and your company, so you’re responsible for any business debts if things go wrong.
The advantages of going it alone
The easiest way to start a business on your own is as a sole trader. You don’t need to fill in any paperwork or give any info (or cash) to Companies House. You just need to register with HMRC for self-assessment.
There’s not too much in the way of day-to-day accounting either. You’ll need to keep a record of your business finances, including income, expenses and profits. Then you fill in a tax return each year to pay your income tax and National Insurance.
And that’s pretty much it. Now you can sit back and enjoy the profits – once you’ve paid your tax, you get to keep all the money you make.
Because the law sees you and your company as the same thing, you’re liable for any money the business loses. So if it goes bust, you’ll have to pay all the debts back from your own pocket – something you won’t have to do if you form a limited company.
You could also end up getting taxed a lot if your business really takes off, as you’ll pay income tax and National Insurance on all your profits. For example, if you make more than £150,000 you could pay up to 45% of it in tax. Ouch.
Being a sole trader means you’re in total control of your business and its future. But it isn’t the best choice if you’re planning on expanding. That’s because of the amount of tax you’re paying on all your profits, even if you’re putting them back into the business. So if you’re planning to build a business empire you might want to look at forming a limited company (you can still do this on your own – you don’t have to have a partner or investors).
It’s also worth remembering that you won’t get any sick or holiday pay. So if you’re ill or want to take a break, you’ll need to put the business on hold too.
In a nutshell
Sole trader is the easiest and quickest way to start a business – there’s not much admin involved, and you get to keep all the profits you make. But because the law treats you and your business as the same thing, you’re also responsible for any debt if you go bust. And you could end up paying more in tax than you would as a limited company.