There’s a not-so-secret movement going on, and you can be part of it. It’s called working for yourself and currently there are estimated to be over 4.6 million people in this sector across the United Kingdom.
There are two distinct business structures in the UK: sole trader and limited company. The clue to the difference is in the wording. A sole trader is one person, running their business as an individual. A limited company can also be run by one person, but it’s a separate legal entity to that person. A key difference is how finances are managed: a sole trader’s business and personal finances are viewed as a single entity, whereas in a limited company they’re entirely separate.
Which structure suits you depends on your personal circumstances and what you want from your business, but there are many reasons why people thinking about starting their own business should consider setting themselves up as a sole trader.
Easy set up
The thought of having to set up a business can be daunting, especially for those doing it for the first time. However, in comparison to registering your business as a limited company, setting up a sole trader is incredibly straightforward. In fact, if you want to become a sole trader today, you could. Registration takes a matter of minutes through the HMRC website and, once you’ve informed them you intend to start doing business as a sole trader, you’re good to go. And if things don’t quite go as planned and you want to cease being a sole trader, you simply need to let HMRC know.
No one likes admin, which is another reason the sole trader route is so popular. Unlike with a limited company, you won’t have to worry about things like Corporation Tax, appointing or removing directors, or completing year end accounts. Of course, being a sole trader isn’t free of admin. You’ll be responsible for keeping detailed records of all your income and expenses, and the dreaded Self Assessment will rear its ugly head once a year, but aside from that it’s relatively plain sailing. And because this workload is less than that of a limited company, accounting fees are generally much lower.
There’s nothing quite like seeing the fruits of your labour, and as a sole trader any money that comes your way from clients is yours. Of course, you’ll want to keep some aside for Income Tax and National Insurance contributions when it comes to filling your Self Assessment, but you won’t have to worry about paying yourself a salary or taking dividends. Instead, the money from clients will go direct into your nominated bank account for you to do as you see fit.
When you’re a sole trader, the details of your business are kept private. This is in contrast to being a limited company, where your information about your business is viewable to all via the Companies House website. If you value anonymity, the sole trader route offers a certain level of privacy.
Downsides of being a sole trader
Without the highs, there wouldn’t be lows. And while being a sole trader can seem like a never ending spree of happiness, there are some disadvantages to consider.
If your business starts to incur losses and you get into financial or legal difficulties, your personal belongings and possessions could be repossessed by creditors. In contrast, limited companies offer some protection for owners in these circumstances.
A limited company can also be more tax efficient as you’re able to take a relatively small salary and draw the rest out in the form of dividends. Additionally, you have the flexibility to leave profits in the business and draw them at a later date. As a sole trader, you have to pay tax on all profits each tax year.
Raising capital may also be a challenge for sole traders. Banks usually prefer the transparency that limited companies have and shy away from dealings with those operating under the more private sole trader structure. Many public sector bodies also prefer the legal protections limited companies offer, so won’t engage with sole traders.
What’s right for you?
The sole trader route is a great way to test the water if you’re just starting out. It’s a relatively hassle-free way to get your business off the ground and you can always look at setting up a limited company later down the line when things start taking off.
When choosing whether to operate your business as a sole trader or a limited company, you need to think carefully about the advantages and disadvantages. If in doubt, get some professional, tailored advice from an accredited accountant.
Jason Kitcat is head of policy & public affairs and micro-business ambassador at Crunch Accounting.
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