What is a sole trader? A sole trader is a self-employed person who owns and runs their business as an individual — there is no legal distinction between the person and the business. It is the simplest and most common business structure in the UK: you keep all the profits after tax, but you are personally liable for any business debts. Sole trader status is set up automatically the moment you start trading; you then have until 5 October following the end of your first tax year to register as self-employed with HMRC.
Advantages
Sole trader businesses generally have the following advantages:
- They are easy to set-up and largely depend solely on a decision by the proprietor to enter in to business and to start trading.
- There are no start-up fees and relatively little administration involved in setting up as a sole trader. HM Revenue and Customs must be notified once the decision to start trading has been made but there are no registration fees which accompany it.
- There is no requirement to prepare statutory accounts or to make public disclosures about income, expenditure or assets held by the business. This could provide a potential cost saving to the new venture.
- Sole trader businesses do not have and therefore are not required to maintain statutory books available for public inspection. This may simplify and reduce the number of administrative duties placed on the new venture.
- Subject to trademark, copyright and restrictions on passing off, sole traders are free to use any business name they choose even if that name is already employed by an unrelated business based elsewhere.
Disadvantages
On the opposite side of the above advantages, there are several disadvantages for sole trader businesses. These include:
- Sole traders are generally seen to lack the prestige normally associated with certain other business vehicles. This is largely due to the ease of which they can be set-up and the impression that they are not as stable as limited companies.
- This perception could have an adverse effect on the manner in which financiers and trade contacts choose to approach requests from the business for credit and funding.
- The liability of the owner of such a business is unrestricted, meaning that personal assets can used to satisfy the debts of the business in the event that the venture is unable to pay.
- As sole traders and their owner are regarded as one and the same for taxation purposes, a destination is not made between the actually amount drawn from the business and what is earned by it.
- This can become a significant factor particularly for new start-up ventures where stock is bought and retained and little is drawn from the business in the early years.
- The tax charge would ignore potentially significant profits which are retained and would tax the sole proprietor on the whole of the trading gains.
Sole traders are typically smaller businesses and for many are the first steps towards self employment. Once the entity is established, it might transfer its trade to a limited company or become a partnership.
This is by no means mandatory, but many might choose to start a business inexpensively as a sole trader in order to test an idea before committing further resources.
Not sure which structure is right for you? See our full comparison of sole trader vs limited company, or the wider overview of all UK business structures.