What is a sole trader business?
Are you thinking of striking out on your own? If so, you’re not alone.
Whether it’s down to the pandemic, dissatisfaction with the traditional employment model or simply the desire to set your own working hours, increasing numbers of us are getting curious about what it means to be a sole trader.
But what exactly is a sole trader? Let’s break it down.
A sole trader is the sole (singular and only) owner and operator of their own business.
The term ‘trader’ usually refers to the buying and selling of goods, but you don’t have to be a merchant to be a sole trader. In fact, a sole trader can operate any kind of business – from tutoring to taxi driving – so long as they’re running the business as a self-employed individual.
There are a few other factors which define a sole trader.
One is that you get to keep all the after-tax profits (so no paying out to shareholders and no duty to re-invest profits back into the business)
Another is that as a sole trader you’re personally responsible for losses and debts incurred by your business – this means personal assets are at risk
Finally, you’re responsible for paying tax on any profits you make.
What counts as a sole trader?
So long as you’re self-employed, make more than £1000 per year, and your business is run by yourself as an individual, you’re to be classed as a sole trader.
You may hear the following terms used to describe forms of non-standard employment which come under the ‘sole trader’ umbrella:
And here are some examples of jobs that can be performed by sole traders:
- Hairdresser, barber, make-up artist or tattooist
- Copywriter, transcriber or blogger
- Tradesperson – plumber, joiner, electrician, builder or gardener
- Web designer, graphic designer or app developer
- Artist or photographer
- Personal tutor or instructor
- Taxi driver, courier or delivery driver
- Childminder, babysitter or nanny
- Personal trainer, sport or exercise instructor
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What do you need to do to become a sole trader?
So, now you know what a sole trader is, but how do you become one?
1. Register with HMRC.
To set up as a sole trader, you’d need to register for Self Assessment tax through HMRC. It’s quickest to do this online via the HMRC website.
If your turnover exceeds £85,000, you’ll also need to register for VAT.
2. Keep meticulous records
A sole trader’s income isn’t taxed at source the way it is when you’re working for someone else. As a result, you’ll need to keep accurate records of your sole trader accounts.
This means any sales, expenses, invoices and bills related to your sole trader business will need to be retained and logged carefully throughout the financial year. At year end, you’ll need to submit a Self Assessment form.
3. Find an accountant
If you’d rather let someone else handle your sole trader accounts, you’ll need an accounting service. That way, you can let a professional handle the books while you concentrate on growing your business (or maybe even enjoy some downtime?!)
What are the benefits of being a sole trader?
No red tape – you’ll have complete control over business decisions. Plus, you can keep all the profits your business makes.
Flexible working is another key benefit to going it alone, as sole traders work as much – or as little – as they like.
Had a profitable year and fancy taking a six-week break in the Maldives to celebrate? Go right ahead – there’s no line manager to answer to.
What are the downsides to being a sole trader?
Every silver lining has a cloud! Downsides of being a sole trader include a lack of employee benefits for you – including no sick pay, no workplace pension and no job security.
Plus, the self-employed can be the hardest hit when economic times get turbulent. Just as you’re able to use the company coffers as your own personal fun fund when times are good – you’re the one who’ll take a direct hit during bad times.
Are sole traders allowed to hire employees?
If your sole trader business is booming, you might wonder if you can bring anyone else on board without having to form a limited company.
The answer is yes. A sole trader can employ someone else, so long as the business is still in your sole name with you as the sole owner.
However, more staff means more admin. The new employee will need to be set up on a payroll, they’d be entitled to certain employee benefits such as sick pay, and you’d be responsible for their PAYE tax and National Insurance contributions, too.
Do sole traders need accountants?
The short answer is yes, usually.
Perhaps the main reason for this is that using an accountant saves a lot of time. As a sole trader, you’re something of a one-man (or woman) band. Your time is precious, and we’ll bet you’ll be spending most of it actually doing your job.
Secondly, an accounting service can help you operate in a tax efficient manner. Whether it’s writing off expenses or ensuring you’re making voluntary Class 2 National Insurance contributions to qualify for benefits down the line, an accountant has your business’s best interests at heart. In short, a good accountant will make sure you’ll only pay the tax you need to pay.
And finally, an accountant can help you take your sole trader business to the next level. Being a sole trader means you won’t have shareholders, senior colleagues, or a board of directors to bounce ideas off, and expansion can be difficult. Having a good accountant at the other end of a phone or email means you can get advice on the future growth of your business from a seasoned expert.
What’s the bottom line?
If you like to call the shots, being a sole trader can be a fulfilling, profitable and wise business decision – especially with a professional handling the books. If you’d like to learn more about how QAccounting could help your sole trader business, get in touch!
Everything you need to know about accounting for small businesses
Running a small business can be both challenging and rewarding. To ensure success, you’ll need to understand the basics of accounting so we’ve compiled a guide to small business accounting to make it clearer. Take a look.
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