Last updated on December 16th, 2023 at 05:22 pm
Making yourself a sole trader is an easy procedure and is the most efficient way to begin a new business. This article will provide an outline of what it takes to be a sole trader and what your obligations are.
What is sole trader?
The term “sole trader” refers to someone who trades as a self-employed business. When you start working as a sole trader, you’ll own and run your company as a sole proprietor and retain all profits after Tax.
It is not a legal difference between the sole trader and their business. A sole trader is:
- Personal responsibility for all debts incurred by the company.
- You are subject to tax-free taxes on income on earnings
- at risk of the class 4 National Insurance or class 2 National Insurance
- The requirement to submit a self-assessment form
- accountable for registering their company and responsible for writing their business HMRC.
Find out the best way to become a sole trader.
Why should I decide to become a sole trader?
A sole trader’s business is the most simple form of business. Its advantages include:
- Being your the boss of your own. As a sole trader, you don’t have to answer to anyone, as you are in complete control of everything you do
- It is easy to start. Registering a company for tax purposes is easy, but more administrative work is required when setting up an organization.
- The setup cost is low. Setting up as a sole trader is a simple procedure and will require less assistance from a professional than if you were to form a restricted business. When you set up with a sole trader, there is no requirement to pay any fees in advance to Companies House.
- A simpler accounting. The accounting process is much simpler when you’re a sole trader. You’ll have to file a self-assessment tax form. However, you won’t need to file an annual account or Corporate Tax Return.
- Claim allowances. You can claim capital allowances when you purchase items you will use in your company, e.g., equipment, machinery, or vehicles.
- The profits are yours to keep. As a sole trader, you can keep the entire profit (rather than sharing the profits with your partners)
- Security. A limited company’s public accounts are accessible and examined from the records in Companies House. Since you are a sole trader, your personal information and financial details aren’t published and are therefore kept private.
How can I earn a living as a sole trader?
You earn money by executing your trade if you are a sole trader.
Your pay will be based on drawings that are withdrawn from the company. If you are a small-scale business owner, taking a minimum amount to sustain yourself is essential. It’s also advised to draw regular income instead of taking money out until you need it, and then taking it out in a large amount could attract the eye of HMRC.
While you don’t have to pay Tax on any of the drawings you make, Tax is assessed on the company’s earnings. It is crucial to ensure you have enough funds to cover the Tax due on the profits.If your payments exceed this, you must keep an even higher percentage.
Tax due on the profits you earn (simply the sales you make less the business expenses) is filed with HMRC via Self-Assessment. The date for filing your return and paying your Tax will be the 31st day of January in the tax year your accounts fall into. If you use accounting software, you may require payments to your bills; it will calculate them for you if they’re due.
Your financial advisor can help you determine the best way to prepare the drawings you have made and your responsibilities regarding tax payments.
What is my responsibility?
You must notify HMRC after you’ve begun trade. The deadline to inform HMRC is 5 October in the tax year you started trading.
You must also submit all of your tax returns and pay the Tax.
As a sole proprietor, it is your responsibility to make sure that you maintain all of the records of your business, such as:
- Purchase invoices and sales invoices
- fuel receipts
- Receipts for business expenses
- Business bank statements
- cheque book stubs
- Information on VAT (if VAT is registered)
- wages slips, as well as summaries for employers who employ employees
- specifics of loans and other capital equipment like vehicles, machinery, etc.
Records and books must be stored securely. There are regulations regarding the length of time that documents for business must be kept.
What are my responsibilities If my company does not succeed?
As a sole trader, you are liable in all respects. That means you are solely accountable for any liabilities that the company has.
Several individuals who have been trading on their own have encountered difficulties when their businesses failed because they needed to come up with mony to pay for any outstanding debts the companies had.