In recent years in the UK there has been real growth in the number of sole traders. Whether that is because more and more people have found themselves out of work or if it’s because a growing number of people are disillusioned with the traditional workplace depends on the newspapers and online articles you read. However, there is no getting away from the fact that more and more people are setting themselves up in business in their own right.
In this article, we’ll explore some of questions that people ask when thinking about becoming a sole trader.
What is a sole trader?
As its name suggests, and in a nutshell, a sole trader is someone who has exclusive ownership of a business. That person runs their business as an individual and in their own name. This does not mean that they can’t have staff. A sole trader is entitled to employ people. They are also eligible to keep all the profits they make after they have settled up their taxes, but on the downside, they are personally liable for any losses they incur. In effect, the term refers to having responsibility for the business rather than necessarily working alone.
How do I become a sole trader?
If you are working for yourself, you are already technically a sole trader. However, in order to be recognised as such, you must register with HMRC and adhere to the rules associated with running and naming a sole trader business. When you are a sole trader, you are self-employed, but you must register with HMRC. Registering with HMRC is straightforward and quick to do.
What are my responsibilities as a sole trader?
Once you have registered, you must keep accurate records of income and expenditure that relate to your business as well as making a tax return on an annual basis. Once your profits have been calculated, you’ll be required to pay income tax on those profits as well as Class 2 and Class 4 National Insurance Contributions (NICs). In addition to these responsibilities, you will also be personally responsible for any business debts you run up and the payment of any bills that are incurred in relation to your business. Furthermore, if your business reaches the VAT threshold, then you will also be responsible for registering for VAT.
What are the disadvantages?
The main disadvantage of being a sole trader is that you are personally liable for any business debts you run up and the payment of any bills that are incurred in relation to your business. While the goal of setting up any business is to make money, there are instances which may be out with your control that can cause financial disaster. If you are a sole trader, there is no automatic protection over your personal assets in event of such financial disaster. Things like your family home and your savings could be at risk. When it comes to taxation, although there are some tax disadvantages to being a sole trader, they depend on your unique situation and are not always true across the board like the risk of watching your assets being seized in the event of significant losses.
Do I need an accountant if I’m a sole trader?
While there is no obligation to have an accountant if you’re a sole trader, there are huge advantages to having such a professional on your side. Not only will an accountant help you make sure that you have all the accounting systems in place right from the start, they’ll make sure that you don’t accidentally fall fowl of any rules that you may be unaware of. In many instances, the knowledge brought to the table by an accountant will help you make significant savings on tax that you may otherwise be unaware of. Add to this, the fact that having an accountant on board means that you can focus on running your business, rather than worrying about doing accounts and it becomes quickly apparent that choosing the right accountant for your sole trader business makes great sense.
If you’re thinking of setting up as a sole trader and would like some support and guidance, why not get in touch? At The Smart Contractor we have a wealth of knowledge and experience that will make your journey easier and more enjoyable. So why not let us help you to make your sole trader business the huge success you deserve?