When embarking on the exciting journey of running your own business, you will come across a series of choices and questions along the way. One of these will be whether to register as self-employed/ sole trader or a limited company. It doesn’t matter if you’re running your business alone, or you have employees; both small and large businesses need to consider picking the right legal structure so that you can operate effectively.
The importance of picking the right business structure
Did you know that the legal structure that you choose can have a vast impact on different areas of your business? It can affect your take-home wage, the tax you pay as well as how visible your earnings and profit are. Here at McCarthy Browne Bookkeeping, we are aware of how overwhelming it can be to pick the right one. Over the next two blog posts, we will explore both options. Below we will the perks and downfalls of registering as a sole trader.
What is a sole trader?
A sole trader or self- employed individual is someone who runs their own business, charges for their services, hires employees, provides the equipment you need to work and or sells goods or services for profit. There is no legal separation between you and your business. This means that you can keep any profits you have made after tax and you alone are solely responsible for any losses.
A sole trader is responsible for updating the HMRC of your earnings and paying the appropriate taxes. As a sole trader, you should ensure you have records for your invoices, expenses and your profits. You will have to fill out tax returns or get your bookkeeper to do so for you.
You must submit your personal self-assessment tax return yearly by the 31st of January. You also need to pay National Insurance. If you do not submit in time, you may get a hefty fine. Have you seen our blog on why you should start your tax return early?
This is the most popular type of business in the UK.
What are the perks of registering as a sole trader?
It is very easy to set up as a sole trader. All you need to have is a National Insurance number ready to hand when you register with the HMRC. This only needs to be done if you’ve earnt over £1000 in a single financial year.
As you are not legally separated from your business, you are free to take money out of your business as and when you need it. Treat these withdrawals as your salary when you fill out your HMRC self-assessment form.
You can claim businesses expenses as a sole trader, as long as you only claim for expenses that were exclusively for the purpose of your business trading. A bookkeeper can help to advise you of this.
If you are registered as a sole trader, your business can operate privately, and you do not have to make any information public.
There is less paperwork involved in being a sole trader and it is easier to file. Your yearly self-assessment is one of the only things to worry about and is very simple to do, especially if you have a bookkeeper.
What are the downfalls of registering as a sole trader?
Sole traders are legally binding to their business, this means that any decisions, profits and debts are the owner’s responsibility. If your business falls into debt, then you are personally liable and can use personal assets.
Tax rates are harsher for self-employed, so once you reach a certain level of earnings, it won’t be as lucrative to start as a sole trader.
Raising finance may be tricky, as investors prefer limited companies. Therefore, you have less expansion opportunities.
There are two options as a sole trader; to trade under your own name, or to trade as a business name. If you choose to trade with a business name, bear in mind that other businesses have the right to trade with the same name too. You should also consider your name very carefully, as you would not want to choose one similar to or associated with a business that has a poor reputation or service.
Before you make your decision, I would highly suggest reading through advice on the HMRC website, as well as looking at the Companies House website. Ask your network for advice, as this isn’t a decision to be made lightly. There are advantages and disadvantages to both, so I would look at what would suit you and your business best. You can always seek the help and advice from a professional bookkeeper too.