You may have seen our previous blog post, highlighting the advantages and disadvantages of setting up a Limited Company as opposed to becoming a sole trader. When setting up a business, both options come with a series of pros and cons.

Different set-ups require a different way of running things, so the right choice for one business could be completely different to another, even if they offer the same services within the same sector.

When you are first starting out in business, many people believe that being a sole trader is the easiest route to take, at least until the business grows. Some people who find being a sole trader beneficial are freelancers such as personal trainers, photographers, artists and hairdressers, but it depends on the circumstance.

What is a Sole Trader?

There are 4 main types of business structures in the UK, and each of these has different tax and liability implications:

–          Sole trader.

–          Partnership.

–          Limited liability partnership.

–          Limited company.

A sole trader is a simple business structure – one individual runs and owns the entire business. They are personally responsible for the success of the business and personally liable for the finances.

They keep all of the profits after taxes but they are liable if the business incurs any losses. The sole trader and the owner are seen as one entity in the eyes of the law, meaning they are responsible for any business debts or failures.

Although this may sound daunting, there are many advantages to being a sole trader:

It works out cheaper to set up

The biggest advantage of being a sole trader is when you first start-up, the costs of doing so are significantly lower than if you were setting up as a limited company. Registering as self-employed is free as opposed to registering as a limited company.

Setting up is easier than if you were a limited company

When you set up as a sole trader, there are fewer legal regulations than if you set up as a limited company, which makes it quicker and easier.

You work and get paid as an individual, so the only legality is to tell HMRC that you are self-employed. As long as all of your necessary licences are in place, you can then start trading. You still have to pay tax on your profits but there are fewer compliance burdens than those that work via a limited company.

Increased privacy

Unlike limited companies, sole traders do not have to upload their personal details to Companies House, meaning you can be private about your accounts, sensitive data and directors information.

Companies House is easily accessible to the public, and many sole traders like that their competitors cannot keep tabs on them. Sole traders are protected by HMRC’s taxpayer confidentiality rules.

You work for yourself

Being your own boss means there are no shareholders or directors to answer to or worry about, and you have full control over how you run your business.

You are free to make your own decisions when it comes to the day to day running of the business, with things such as finances, workflow, business strategy and hiring, and the decision making is much quicker. You can also set your own hours and focus on your own long-term goals without having to agree with other people.

Above all, it means you get to keep all of your post-tax profits, and do not have to worry about sharing these out to shareholders and directors.

You can add your own personality

As a sole trader in a lot of industries, your services are not the only thing you offer a customer. Your character, quirks and all, are what sells you too.

People buy into you as a person when you work in a customer facing role. Whether you’re a personal trainer or a hairdresser, run an independent shop or you’re a wedding photographer, your personality is what retains customers and is why people recommend you.

Larger brands are not able to add their own stamp, which gives you the upper hand.

There is less admin

Because there is less regulation, it means there is less paperwork. Less paperwork means more time to run your business and less time needed on admin. Add into the mix a good accountant, and you can fully concentrate on what you do best.

It’s easy to switch to a limited company

If you start out as a sole trader, it is much more flexible to change over to a limited company down the line. To move from sole trader to limited company status, you send an application to Companies House and this can be approved as soon as 3 working days later.

If you did things the other way around and started out as a limited company then decided to switch to a sole trader, you would have to dissolve the company first and step down as the director.

If you do want to want to shut the business, you will have to do the following:

–        Alert HMRC

–        Settle any liabilities

–        Collect money owed

–        Keep or sell any physical assets and equipment

–        Distribute any residual money to the owner

As a sole trader, you can only sell the assets. However, with a limited company there are a lot more steps to the process, which can be complicated.

You can get tax back on losses

You are more likely to make a loss in your first 4 years of trading than at any other time, but if losses occur in the early days, you can set these against other income streams. This helps to reduce the amount of tax you pay.

Setting up a business is a daunting process, especially if you’re a start-up coming from full-time employment. There are limits and caveats, but there is the option to carry back that loss.

Early year loss claims apply in the first four years of trade. In your first years, once you’ve worked out your tax adjusted loss, you might be able to carry that loss to a prior year, where you may have been paying tax at 40%.

It is worth speaking to your accountant about this, as they will be able to give you expert, impartial advice on the best way of sorting your finances.

Becoming a sole trader

If you are setting out as self-employed and you’re unsure whether to set up a limited company or become a sole trader, it depends on your circumstances and what is best for you. The decision will be based on a number of factors including how much you are expecting to make in your first four years.

Setting up as a self-employed sole trader is the simplest way to start a business, with minimal paperwork and record keeping. The majority of our clients at Gorilla are sole traders, so we know exactly what you need, from start-up and beyond.

Starting a new business is an exciting venture and can be incredibly rewarding, but it is important to make sure that you are as efficient as possible at any stage of a business’s development. This includes using an accounting firm that you can trust.

Our expert team can help you from company formation and tax planning advice to R&D claim submissions, and much more. We are also fully MTD compliant, meaning you can make your tax digital from the get go.

If you’re looking to join us, now is a great time. We are the Number 1 Ranked Tax Advisor on Trustpilot and offer fully inclusive accountancy packages so you know exactly what you’re paying month on month.

To sign up, click here to fill in our online form, or request a call back today.