When Do You Have To Register As A Sole Proprietor

What is a sole trader and how do I register every bit i?

Updated 01 March 2022

7min read

Sole trader - geddit?

Beingness a sole trader is often considered the simplest mode of running a business organization – at least when the operation is a modest one. You lot take flexibility and full control over how you operate – just you're too personally responsible for its success or failure, which can exist daunting and potentially very plush.

Sole traders don't have to register with Companies House, but they exercise take to maintain accounting records, pay income tax and file a self-assessment return with HMRC every tax year. For all the ins and outs of being a sole trader, read on.

What is a sole trader?

When you are both self-employed and the sole owner of your business, y'all're considered a sole trader. Sole traders have no shareholders or directors, dissimilar a express company, and no other people responsible for liabilities, unlike a partnership.

You're in full control of the business organisation, overseeing its assets and benefiting from all profits after tax. This can be rewarding, merely it also comes with a risk. Sole traders have what's known as unlimited liability, pregnant if the business becomes insolvent or is sued, so you're personally liable to creditors and must pay any damages yourself.

Sole traders are near commonly small businesses that provide a service to individuals and families. They oft have no or very few employees, and include the likes of photographers, plumbers, interior decorators, makeup artists or hairdressers.

What's the departure between a sole trader and self-employed?

A sole trader is a cocky-employed person, merely a self-employed person is non necessarily a sole trader. It all comes down to your business construction.

You're a sole trader when yous're cocky-employed and the sole possessor of your business. If y'all're self-employed, simply are in a business partnership or run a express company, yous're not a sole trader. Nearly contractors operate as limited companies (either ane-person companies or under an umbrella company), so even though they work alone and utilize no-one, their business concern is not a sole trader merely a visitor.

What are the advantages of being a sole trader?

Being your ain boss ways you set the rules. You have total control over what yous practise, when y'all exercise it and how you practise it. This allows for more flexibility, giving you the liberty to brand quick decisions without the need for any board or shareholder approval (which is useful when you're dealing one-on-1 with clients).

There are other advantages to existence a sole trader, including:

Sole traders are quick to prepare and have fewer statutory obligations
You lot don't accept to annals a company name or complete any Companies House forms, such as the annual Confirmation Statement. All yous need to practise is inform HMRC that you're cocky-employed and operating as a sole trader, by registering for self-assessment. You tin practice this online or by postal service.
Sole traders have an easier accounting job
You lot don't need to come across the same accounting standards as express companies, which accept to file corporation tax returns and annual accounts including balance sheets. All yous need to worry virtually is maintaining a record of your invoices and expenses, and sending details of your profits in your annual Self Cess tax return. Considering of this, your accountant volition accuse you less than they charge a limited company.
Sole traders can go along the profits
Whereas limited companies have to dissever profits betwixt shareholders, y'all can keep everything you earn (after revenue enhancement and deductions similar wages, if you utilize anyone). You lot also personally ain all the assets used in the business.
Sole traders can go along their financial data individual
Because you don't have to requite any data to Companies House, there's less publicly accessible information on you. This tin can give you a competitive advantage, since competitors can't come across how well (or badly!) you lot're doing.
Sole traders can change their minds as they grow
It's easy to motion from existence a sole trader to a limited company, just more irksome to do it the other way around. Sole trading can be a skillful identify to showtime and exam the business waters, giving you the selection to modify your mind if a limited company looks similar a better option later on.

What are the disadvantages of being a sole trader?

Working outside of a visitor structure has its drawbacks. The buck stops with you, so you take all responsibility for big decisions. Some sole traders also battle with hitting a healthy piece of work-life residue, since information technology's difficult to know when to take time off. Only more serious disadvantages include:

Sole traders have personal liability (and unlimited liability)
Sole trading businesses aren't recognised equally split up legal entities from their owners. This is perhaps the biggest drawback of existence a sole trader. All the business debts and liabilities are yours. If yous fail to pay off your business organisation debts, you'll need to pay the money owed from your ain assets. This could even hateful losing your home.
Sole traders aren't attractive to some clients
Certain clients may be reluctant to work with a sole trader, either because they see them equally a college risk, or just because they seem less prestigious. This depends on your manufacture and customer type, so it'southward worth doing your research before deciding what type of visitor to set up. In particular, if y'all are a freelancer/contractor, companies may be reluctant to hire you lot as yous might appear to exist an employee for revenue enhancement purposes.
Sole traders face tax planning limitations
Although you can merits tax allowances on certain business concern expenses and avails, limited companies generally savour more tax benefits. When a good turn a profit is made, for example, limited companies pay less than their sole trader counterparts. Employed owners of express companies tin can also depict dividends from their company, which acquit a lower tax rate and give them more than have-home pay.
Sole traders risk a break in business continuity
If a sole trader has a bad accident or falls seriously sick, the responsibleness of fulfilling existing contracts notwithstanding sits with yous. This can be stressful, or issue in debt if yous're unable to piece of work. When setting upwardly your business concern, information technology's worth giving attending to these scenarios, planning effectually them and taking out business insurance where needed.

How do you register as a sole trader?

To register as a sole trader, you need to:

Contact HMRC. Let them know you're self-employed and will be paying tax as a sole trader.
Complete the HMRC registration class for self-assessment, either online or by post.
Actuate your HMRC online account. Once you've completed the registration course, HMRC will ship yous a 10-digit Unique Taxpayer Reference and an activation code for your online business relationship.
Consummate your almanac self-assessment tax returns, using the online account you lot prepare up.

There'due south no need to register with Companies Business firm as a sole trader.

How much tax does a sole trader pay?

Sole traders need to pay income tax, likewise as Class 2 and four National Insurance (NI) contributions, on all taxable business organization profits.

Income revenue enhancement

Sole traders that earn less than £100,000 in a tax year benefit from a personal allowance (or tax-gratuitous income), which for the current year is £12,500. If you earn over £100,000, this allowance decreases by £i for every £2 of income over £100,000. If yous earn over £125,000, y'all don't receive a personal allowance.

The amount of income tax you pay depends on your income afterwards this personal allowance. The following table is useful:

Band	Taxable income	Taxation rate
Personal allowance	Up to £12,500	0 per cent
Basic rate	£12,501 - £50,000	20 per cent
Higher rate	£50,001 - £150,000	twoscore per cent
Additional rate	Over £150,000	45 per cent

Every bit an example, Remy is a plumber who made a £xix,000 turn a profit last year. After subtracting his personal allowance, his taxable income is £6,500. This falls into the twenty per cent ring, pregnant he pays £one,300 in tax.

Class 2 and iv NICs

If your business concern profit is over £6,475, you'll need to pay Class two NI contributions, which is currently £158.60 a year. If your turn a profit is over £9,500, you'll also need to pay Course iv NI contributions, which is calculated as a percentage of your full profits during your Self Assessment.

How do sole traders pay tax?

Subsequently completing your self-assessment render and calculating the revenue enhancement you owe, y'all can pay HMRC using a debit card, credit carte du jour, online banking, CHAPS or by visiting your bank.

What expenses can you claim dorsum as a sole trader?

Often, HMRC won't revenue enhancement you on money that yous demand to spend to keep your business organisation running. For this reason, when calculating your tax you tin can deduct a range of operating expenses from your gross income. Yous can view the total listing of tax deductible expenses here.

What accounts do sole traders need to go along?

Sole traders don't demand to submit equally many accounts to HMRC as express companies. However, yous practice need to keep a detailed record of all your business concern income and expenses, which will be used during your tax return. This includes original invoices and receipts.

Do sole traders demand a dedicated bank account?

Sole traders aren't legally required to have a dedicated business bank business relationship. Considering HMRC treats your personal and business organisation income as one and the same, you can use your personal bank account for your business. Notwithstanding, it is highly advisable to keep everything carve up so that you don't end up spending business organisation funds on personal purchases, or vice versa.

Do sole traders need an accountant?

Accountants are a valuable back up organisation for sole traders. Although you lot don't need to submit as many accounts as a limited company, an accountant can notwithstanding help you navigate your self-cess every year, continue rails of your invoices and expenses, and calculate how much taxation you lot demand to pay. With personal allowances and tax-deductibles, working out what you owe tin can go complicated.

Staying on top of your tax and accounts is particularly of import for sole traders, since you lot're personally liable for any debts. But accountants can as well assistance you save money, making sure your concern is as tax efficient every bit possible.

Can I get sole trader insurance to protect me?

As a sole trader, y'all're liable for any debts or damages incurred by the business organization, and at risk if you find yourself unable to piece of work. For these reasons, information technology'due south worth taking out business concern insurance as a sole trader. What you lot need depends on your business, only the four main types worth exploring include:

Employer'due south liability insurance
Public and product liability insurance
Professional person indemnity insurance
Building and contents insurance

When should I alter from sole trader to limited visitor?

Being a sole trader is a good place for a new business to showtime. However, as your profits grow, y'all could lower your tax bill by condign a limited company. This will besides give you limited liability (thus ameliorate financial security), likewise as greater borrowing power and more competitive brownie.

Only you don't have to become a limited visitor. Some people are happy staying sole traders. If yous do you call back you're ready to make the move, speak with your accountant about it. They'll assess whether your company is in a good financial place to fix as a limited company and offer y'all informed advice on the adjacent steps.

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Source: https://www.unbiased.co.uk/life/small-business/what-is-a-sole-trader-and-how-do-i-register-as-one

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