Business Advice · 17 March 2021

Is a sole trader a small business?

Is A Sole Trader A Small Business?

There are many different business structures across the world, from non-profit organisations to government-owned companies to limited companies and sole traders. As an entrepreneur, you may need a greater understanding of the business structure of ‘sole trader’.

Is a sole trader classed as a small business?

A sole trader is a small business. It is owned by a self-employed individual, and it is run by that same self-employed individual.

The “sole” is sole trader refers to the fact that there is one owner and one legal entity. The owner is the business, and the business is the owner. The two are inseparable in the eyes of the law and in the eyes of HMRC.

Have you picked a name for your new small business? It doesn’t have to be your name. You may not include: ‘Limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc.’ You don’t register the business name with Companies House but still can’t use those legal business name terms.

Your sole trader business can also not use the same name as an existing business or trademark, EVEN though you are not a company. Believe it or not, there is also a list of sensitive words and expressions that you cannot use unless you get the necessary permissions from professional organisations.

What is the difference between a sole trader and a small business?

There is no difference between a sole trader and a small business, but there is a difference between a sole trader and a COMPANY.

As a sole trader, you are a business, but unlike a company, you personally are wholly responsible for the success or failure of your business, including all business debts and legal actions.

The advantage is that all profits, after tax, are yours.

While the terms self-employed and sole trader are slightly different, they are usually interlinked. A sole trader is a business structure. Self-employed is your tax definition.

You will use the self-assessment system to pay your income tax and National Insurance contributions (NICs).

It is important to note that you can be self-employed AND be part of a business partnership or limited company.

What type of business is a sole trader?

If you earn over £1,000 from your self-employed work in a tax year, you are legally required to register with Her Majesty’s Revenue and Customs (HMRC) and define yourself as a sole trader. You should also make Class 2 NICs payments to ensure access to benefits.

A sole trader business is a simple business structure. You don’t register with the Companies House, there are no shareholders, directors or partners, and you are the operations manager and the strategist.

Traditional trades like plumber, electrician, decorator and builders are mostly sole traders, and so are interior designers, architects, dog trainers, therapists, graphic designers, writers, search engine optimisation (SEO) experts, face-painters for parties, tutors, hairdressers and mechanics.

Find yourself in there? Congratulations, you are a Sole Trader business.

Are you an online jewellery designer or baking consultant? You are still a sole trader.

Can a sole trader in the UK have employees?

Short answer: yes. You will need to arrange employers’ liability insurance, pay above National Minimum Wage, check if the employee is allowed to work in the UK and set up a workplace pension scheme when they earn £10,000+/annum.

Get an H.R. professional to establish a written ‘statement of employment particulars,’ a handbook, a contract containing the job’s terms and conditions and register as an employer with HMRC, by the latest, four weeks before your new staff get paid.

Remember, as a sole trader; you are personally liable to those employees.

Sole traders and registration with HMRC

As a self-employed sole trader, you will need to register to pay income tax to the HMRC. You will use the self-assessment system. You do not pay company tax.

The way the HMRC knows you are a sole trader is when you register for self-assessment. You will send a self-assessment tax return annually of declared earnings and valid expenditure. You will self-assess the tax on your profits. Your Class 2 National Insurance contributions can be paid via your tax return as well.

The deadline for registering for self-assessment is by the 5th of October in the second tax year of the business’s life. In the UK, a tax year runs from 6 April one year to 5 April the following year.

It’s important to be aware that if you are doing a first-time registration for self-assessment with HMRC, there is an extra step to go through, so don’t leave this to the 11th hour on the last day.  HMRC doesn’t consider the dates of actions made. They consider dates of actions reading as registered in their system FINALLY and dates of money arriving in THEIR accounts. If the deadline is the 6th and information or funds arrive on the 7th in their system or in their account, then you have missed the deadline, and there will be penalties.

The online self-assessment service is a step-by-step process, which ends with another waiting period. You will receive an activation code for your brand spanking new self-assessment account. This is not a 20 minute nor a 24-hour wait. This can, on average, take about ten days to arrive.

You will not have access to your account/profile, and you will not be able to capture information until that access code arrives. Thankfully, this is a once-off process, and once you have, you will not have the added delay. Don’t let that give you a false sense of security about deadlines. Plan for the inevitable.

Watch those HMRC deadlines. There are late filing and late payment penalties. When switching from (PAYE) system of paying tax, handled by a company’s H.R. department, this handling of your own taxes, registrations etc., can take some getting used to. Avoiding it is not a solution.

In fact, it is a fine idea to get professional help with your tax calculations and submissions. It would be a shame if you were not deducting all valid costs. Equally, it would be a shame if you are penalised for unwittingly deducting invalid costs. Mistakes attract penalties. Ignorance is not a valid argument in the eyes of the law and HMRC.

Outsourcing “boring” admin to a bookkeeping or accounting firm means you can handover tracking of income, expenses, receipts, till rolls, cheque stubs, bank statements, and focus on your favourite part of the business!

Do you need a business bank account?

After you have registered as a self-employed sole trader with HMRC, you can do the launch of your exciting new business. Being a business and a business owner means being financially responsible. As mentioned above, this ranges from filing your income tax with HMRC timeously to producing and managing invoicing, strategically managing debtors and creditors and, before you have even started with that, you need to choose, as a priority, which bank and which bank account you will be selecting from the range available.

As you know now from the above, you and your business are one entity as a sole trader. This means that, in principle, you can use your personal bank account for your business finances.  The disadvantage of this strategy is that it can cause challenges over the medium to long term.  If, on the other hand, you choose to use a separate sole trader bank account for business transactions, you will then find it a lot easier to keep an eye on cash flow. You will go to appreciate the boring old phrase “cash flow is king”.

In addition to an easier cash flow overview, you will find that analysing and filing your annual tax returns is a LOT easier if you have a separate business-dedicated account.

Sole trader bank account

As with all decisions relating to your new business, the type of bank account you choose will vary subject to the structure of your business.

There is a legal requirement for Limited companies and Limited Liability Partnerships to use a dedicated business account for all transactions. Remember that the limited company is itself a separate legal entity. It must receive its own money into its own account. For payments there might be multiple code holders as all partners might be permitted to make payments with, preferably, a two-step payment confirmation process.

The limited company actually OWNS any money it generates. You, as the director, do NOT own that money. You are a PAYE salaried individual, and perhaps you get dividends as a shareholder. Only those funds are owned by you.

The limited company’s finances must be kept separate from personal accounts. In addition to this, there is a legally recognised process to move money from a business account to personal account e.g. PAYE or dividends or a loan after corporation tax.

But we are here to talk about sole traders.

As you and your business are one entity, you, as a sole trader, are not legally required to separate finances for you and for the business via bank accounts.

It is, however, far easier to track and manage business finances when a separate sole trader bank account is used solely for business transactions.

Did you know that within Britain, you will find that three-quarters of all British businesses are, in fact, sole traders!

What are sole trader bank accounts?

In its simplest form, a sole trader bank account is a business account that allows multiple, low-cost transactions daily with no caps etc. Most banks and specialist business banks offer them, including a business cheque book, a debit and credit card, online and telephone banking, as well as overdraft facilities.

The main differences between your personal account and your business account is the lower interest rates paid by your business account and the higher fees. There will most likely be a monthly account fee as well as transaction fees. Monthly fees may cost, for example, between £5 and £15. A sole trader bank account has fewer perks than personal bank accounts, such as cashback offers or vouchers. What you might be offered, however, is free business advice, access to a dedicated business bank manager, discounts on business services and lower purchase prices for an online accounts software.

Why use sole trader bank accounts?

Some banks won’t allow the use of a personal bank account for business transactions. The terms and conditions of your personal bank account will tell you whether you can use it for business. If you transgress those terms, your bank might close your account. High levels of transactions and prolific over-the-counter cash and cheque deposits will indicate to the bank that a business is processed through a personal account for business.

It is also so much easier to clearly track business transactions for preparing for the filing of your annual returns with HMRC despite your business and personal income being treated as one for tax purposes. The difficulty arises when you need to identify and offset allowable expenses such as equipment, travel and salaries against income. If everything is dumped into your personal bank account, you will have a much more difficult task filtering through the information. It will also make it a lot more difficult for any software to do A.I. identification of transactions, i.e. your accounting will be far more manual.

Choosing a sole trader bank account

It is easy to be enticed by some initial deals and discounts related to new account openings, such as 12-18 months of free banking. This is super attractive to any start-up business. It is prudent, however, to look past the offers and choose the best value account with regards to transaction costs, business benefits, and so on.

Business accounts costs can be high. Take the time to research, or ask your accountant, and pick the option with the lowest fees for the particular transactions you’re expecting.

Look at online business reviews of bank accounts and avoid banks with consistently poor reviews.

Consider what your business needs from a bank account. Transaction limits? Overdraft facilities? Linking to business accounting software?

Do you need a physical bank presence close to your business? How easy is it to meet with the business bank manager?

A bank is the same as any supplier so let them know you’re evaluating their competition.  Choose a bank that wants your business and is prepared to offer you a competitive deal.

Most high street banks offer business accounts, and some offer free online banking for startups for 12 months or more. Some examples include:

NatWest’s Start-ups, Santander’s Business Current Account, TSB’s business account.

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