You’re considered a sole trader when you’re self-employed and exclusively own your business. According to the government, nearly 60% of UK businesses are sole traders, which corresponds to 3.4 million businesses out of 5.6 million. This is one of the most popular types of business structure, as it’s very simple to start trading and paperwork tends to be minimal.
Are you wondering if becoming a sole trader is for you? Or have you already started your business but want to learn more about what it means to be a sole trader? As sole trade accountants, we aim to make your life easier, so we put together a few tips on how to trade successfully, which you can find in this article.
To Be or Not to Be a Sole Trader
First of all, we believe it’s important to understand the benefits and drawbacks of choosing to operate as a sole trader. There is no denying that this type of structure offers many advantages; , you’re in full control of your business, are capable of employing people and can enter into contracts. When it comes to paying taxes, you do so on your profits, which means you keep whatever is left.
You also have a greater degree of privacy by being a sole trader, as the details of your business are kept quiet and you don’t have to make anything public. Should you change your mind and wish to close the business, it will be easier to do so as a sole trader than as the owner of a limited company, which will require you to de-register from Companies House and resign as director, for example. As a sole trader, you just need to settle any debts, collect money owed, deal with physical assets and notify HMRC.
On the flip side, you have no limited liability and your personal assets are on the line if the business fails. This is because your business is not a separate legal entity, so you’re liable for any debts incurred – if you start your business with a significant amount of debt as startup costs, for example, you may want to set up a limited company, instead, in order to protect yourself. As a sole trader, you will also have to follow certain rules on running your business, as well as naming it (for example, you can’t include words such as “limited”, “Ltd” or “public limited company”).
Consider the pros and cons before taking the plunge, as that will help you to make the right decision for your business.
Gorilla Accounting’s Tips to Be a Successful Sole Trader
Many individuals choose to work as a sole trader because this decision allows them to have freedom and independence when it comes to their work and daily life. Before making the leap, there are several important things to take into consideration, including financial decisions.
Open a Dedicated Bank Account
For instance, you may want to start by opening a dedicated account for your business’ finances. While you can receive and make payments from your personal bank account if you operate as a sole trader, having a separate account is the best solution. It will make everything a lot easier, from knowing how much tax you owe to being able to easily keep a close eye on expenses and income.
Register with HMRC
You need to declare your status when you start trading as well, so register as self-employed with HMRC as soon as possible. The latest you can register is by 5 October after the end of the tax year during which you became a sole trader. If you don’t register or register too late to pay your taxes, you can be severely fined and penalised.
Consider Tax and VAT
According to HMRC, as a sole trader, you will have to keep records of your business’ sales and expenses, send a self-assessment tax return every year, and pay income tax on profits, as well as Class 2 and 4 National Insurance. Even if you don’t make any profit in your first year, you have to declare your income and expenses on a tax return. There are also some things you can and cannot claim tax relief for, so make sure that you research what you can claim.
If your annual turnover is more than £85,000, you will have to register for VAT. You can also do it if you think it will suit your business, even if you don’t meet this threshold; if you trade with other VAT-registered businesses, you can then reclaim the VAT.
Take Out Insurance
Nowadays, contractors insurance is a necessity that you can’t avoid. If you plan on working as a sole trader, you need to take out insurance both for legal reasons and peace of mind. Insurance is there to help in case of mistakes, accidents, disputes and even government enquiries.
What type of insurance do you need? You can take out public liability insurance to cover injury or accident claims, as well as claims for damaged property; typically, this type of cover can vary between £1 million and $10 million. Professional indemnity insurance is key if you offer advice or any kind of professional services; this is because this type of cover can protect you in case a client makes a claim against you due to advice that lost them money, for instance.
Chase Payment When Needed
Dealing with late payments is, unfortunately, part of being your own boss. Some clients either pay late or don’t at all, so it’s crucial that you chase them up on it; this can be a time-consuming and frustrating task, so make sure that you don’t get into a situation where you depend on clients being 100% on time with their invoices. Follow up as soon as the payment is due and at frequent intervals after that.
Focus on Developing Skills
It can be easy to get bogged down with work or overwhelmed at how many things you have to juggle when you become a business owner. However, while becoming sidetracked is understandable at the beginning, it’s also important that you develop your professional and personal skills. This means that you should take the time to participate in courses and attend conferences or event shows, just to mention a few. By doing this, you stay up to date with market changes and demands and can more easily find new clients by possessing a varied set of skills.
Choose the Best Place to Work
Many individuals dream of being their own boss to take control of their professional lives and enjoy a better work-life balance. However, despite its benefits, it’s also vital to consider that being self-employed comes with some downsides. For instance, you can become lonely when you don’t interact with people all day long
You can also get easily distracted, especially if you work from home. Maintaining productivity can be difficult because you’re more likely to get interrupted or distracted by chores that need doing. When working from home, it helps to create a space reserved for working so that you can more easily separate your work from your personal life.
Be disciplined. Create a workday as if you were going to the office and dress accordingly, even if you’re working at home, as this can help you to enter ‘work mode’. The best thing about being self-employed is that you can choose your own hours, so you don’t need to work from 9 to 5. On the contrary, if you’re a night owl, you can work at night and rest during the day, for example.
Don’t forget to add a cut-off point as well. While we understand you’re very busy as a sole trader, you can’t, realistically, work every waking hour. Give yourself breaks, a lunch time and, of course, an hour after which you won’t do any more work.
Always Make Sure to Save
Due to the nature of sole trading, it’s your responsibility to not just raise capital for your business but also save money for a rainy day. You may need new equipment to do your job, wish to reinvest money in your business in order to grow it, use it to pay your taxes, and so much more. You can take out a loan if you prefer to stay clear of using personal assets to save money.
Investing in Branding Your Business
When you’re self-employed, it’s crucial that you develop a brand identity that corresponds to your values and how you want your target audience to perceive you. From the name and logo to the font you choose and your website, there are many factors to keep in mind when branding your business. Think about all elements carefully, research them well and take your time to reach a decision you’re happy with – after all, you’re building the ‘face’ of your business.
Choose the Right Tools for the Job
Being a sole trader means handling a massive amount of paperwork, from contracts to returns. Instead of relying on Excel sheets or physical documents, investing in an accounting tool can make your life a lot simpler.
Our FreeAgent bookkeeping software, for example, is not only MTD-compliant, but will also save you time and effort. Among its many advantages, it allows you to set payments to be automatically chased if they become overdue, to upload receipts and manage expenses and to update banks transactions daily. It will also help you to make business decisions by offering you real-time information you can view whenever you want and in any device.
By using accounting software, you can also keep track of everything; this audit trail is useful as it allows you to have records of everything that was done and by whom.
Incorporate If You Wish
While starting out as a sole trader has a lot of advantages that someone new to self-employment can certainly enjoy, you don’t have to retain this status forever; in fact, you can become a limited company down the line if you prefer. The size and nature of your business is unlikely to stay stagnant over time, as circumstances change; so, if you want to opt for a higher exposure to risk, for instance, but don’t want to put your personal assets in jeopardy, incorporating your business can be a great solution.
As long as your chosen name hasn’t been registered with Companies House, you can still use it when you become a limited company (with Ltd added). In addition, becoming the director of a limited company may offer you a decrease in income tax, as well, since this type of structure provides many advantages for self-employed individuals.
Request the Services of an Accountant
You’re not legally obligated to engage the services of professionals advisors such as contractor accountants – however, if you’re concerned about the financial side of your business, you should. After all, you’re busy forging relationships, winning new customers and promoting your services, meaning it’s difficult to find time to also handle your business’ accounts when you have so much to do already. A professional who specialises in accounting for contractors and freelancers can sort it all out for you, especially if they have experience with sole traders.
Sole traders have to wear a lot of hats, from promoting their business to taking care of administrative tasks and actually performing the services they’re hired for. We know you already have enough on your plate, so, by choosing Gorilla Accounting, you don’t have to keep up with regulations that are constantly changing or waste time trying to understand government rules. We’ll take the hassle out of accounting and ensure that all of your paperwork is accurate and up to date.