What does it mean to be a sole trader and what are my responsibilities?
Becoming a sole trader can be a popular option for those who want to work for themselves and conduct their own business. Many small business owners are sole traders, and they use this legal setup to work and pay taxes in accordance with the law. Learning what it means to be a sole trader, what responsibilities come with it and the pros and cons of this working arrangement could help you decide what you want to do.
What is a sole trader?
Sole traders are self-employed professionals whose business dealings are not separate from them as individuals in the eyes of the authorities. This means that they are responsible for recording all of their business dealings in terms of sales and expenses. This information is then organised and reported HMRC on an annual basis and so that any outstanding tax can be paid. A sole trader is not a legal entity, such as a limited company, but rather the individual has full responsibility for the business.
This type of business is extremely popular because it’s very simple to set up and run compared to other types of businesses. To begin operating as a sole trader, you want to register with HMRC so that you can be taxed under the Self-Assessment system instead of the Pay As You Earn system that employees are taxed under. Many companies originate from one sole trader who expanded their business and then set it up as a more complex business type.
What are my responsibilities?
Researching what legal responsibilities you may have as a sole trader before registering as one can help you prepare. You can find out all the relevant information you need on the government website. Your primary responsibilities are to register as a sole trader, get your Unique Tax Reference number (UTR) and file your taxes on time. Also, as a sole trader, you can choose to invent a name for your business, or you can use your own name. It’s important to check that the name is not already in use by another business, and for good measure, you can also check that the name is not already in use as a domain name.
Ideally, the name you choose is not be trademarked, and you want to pick one that you can use as a domain name and website. It would also be advisable to set up a separate bank account for your business, which will ensure business transactions and personal income/spending are kept separate – this will also help make business cash flow easier to identify & calculate.
Some sole traders are required to pay VAT, and others do so voluntarily. If your turnover is greater than £85,000, you are legally required to register for VAT and make payments. If your business sells to other VAT registered businesses, you may want to register voluntarily so that you can reclaim the VAT.
What are the advantages/disadvantages of becoming a sole trader?
Being a sole trader can have its advantages and disadvantages, and it is important to consider both before determining whether a sole proprietorship is right for you.
Advantages – Free to start, Full control of the company, Control over all revenue and can offset any losses against other personal income.
Disadvantages – Personally liable for any lawsuits, limited options for raising capital and you are solely responsible for taxes.
Ready to go in 4 simple steps
If you are feeling ready to go on your journey as a sole trader, you can get started in 4 simple steps detailed as follows;
1. Register for self-assessment – The first thing to do is register for self-assessment, as this lets the tax authorities know that you are a self-employed person and that you need an SA tax record set up.
2. Get UTR number – Your UTR number functions similarly to your national insurance number in the sense that HMRC uses this to identify you and find your record. Without a UTR number, you cannot file your tax return.
3. Accounting software – Using an accountancy software will be able to help you prepare your tax return, by connecting to your business bank account, logging expenses, issuing invoices and preparing year end reports. Direct Peak are on hand to help with choosing the right to accounting software for your needs.
4. Get earning – If you are a UK citizen, you have a tax free personal allowance, which is currently £12,570pa in which you can earn without paying any income tax or national insurance insurance, so get out and start your self-employment journey!
Direct Peak are on hand to help with any advice on setting up as a sole trader, so get in contact with us today!