The Sole Trader Advantages You Need to Know

The choice of which business structure is right for you and your company is one that all self-employed people face. The business structure you choose impacts the amount of tax you’ll pay and therefore how much you’ll earn, the level of financial exposure you face and how much time you’ll need to spend on admin, reporting and compliance obligations.

It’s estimated that there are 3.1 million sole traders currently operating in the UK and in this post we’ll examine why as we break down some of the key sole trader advantages that make personal ownership so popular.

Simple Low Cost Set Up

If you’re looking for a quick and easy way to get into self-employment then sole trader is the business structure for you. If you chose to set up as a limited company you’d need to register your business with Companies House and provide various documentation including articles and memorandums of association and a share certificate.

A unique company name must be chosen, Shareholders and Directors must be appointed and you must also register for Corporation Tax, self-assessment and pay a registration fee to incorporate the business. It’s a much more complex process to get set up.

As a sole trader you need to choose your company name, register for self-assessment with HMRC so you can pay your income tax, register for class 4 National Insurance Contributions and you can start trading which makes the sole trader set process up a friction-free path to self-employment.

You don’t even have to set up a business bank account but we would recommend you do so to keep your business and personal finances separate.

Control and Flexibility

As a sole trader you are sole owner of your business and, as such, you have full control over every aspect of your company from your rates to strategy to your working hours and the jobs you do. This has various benefits, not least in terms of being able to strike a work/life balance that’s right for you.

It also provides significant flexibility and adaptability as you don’t have to consult with fellow Directors, Shareholders or Partners over business decisions which enables you to react quickly and decisively making key decisions quickly on important issues such as new opportunities, threats or unforeseen circumstances.

There’s Less Admin

Sole traders benefit from having significantly less admin to deal with compared to self-employed people operating through a limited company. With a limited company you have to pay corporation tax, complete your self-assessment tax return, prepare and file annual financial statements, maintain a statutory register and complete various formalities such as annual general meetings.

As a sole trader you are free of most of this red tape but will need to complete a self-assessment tax return and keep records of your income and expenses. This reduced admin burden frees up more of your time to focus on building your business.

Your Privacy is Protected

When you trade through your own limited company information about your business including the registered address, details regarding the Director(s), financial statements and the company accounts are all available on public record through Companies House.

This information isn’t publicly available for sole traders which helps to keep their personal, financial and business details private.

Control Over Your Profits

As a sole trader, the net profit of your business belongs to you. You have direct access to it and full control over how it is used. You could take an owner’s drawing and withdraw the funds for personal use or the profits could be retained and invested in the business depending on your priorities.

As a sole trader you’ll benefit from relatively low overheads and you don’t pay Corporation Tax which will all contribute to a better profit margin.

The picture is different for limited companies as the profits belong to the business and they might have to be distributed amongst multiple Directors and Shareholders and Corporation Tax would also have to be deducted.

Is Sole Trader The Right Structure For You?

As with any important decision you have to make, it’s vital to consider the advantages and disadvantages first. Although there are many positives to operating as a sole trader, just as there are when operating through your own limited company, there are also some downsides which should be considered.

As a sole trader you personally own your business, there is no legal distinction between the two entities. This means that you are personally liable for any debts that are incurred by the business and your personal assets could therefore be targeted by creditors to recoup any monies owed. This is known as unlimited liability so it’s important to consider the level of financial risk you are prepared to face.

As a limited company the business and the owner are two separate legal entities so the owner benefits from limited liability. This means that the business itself is liable for any debts incurred and the owner’s financial risk is limited to the amount that they have invested in the business, which usually safeguards their personal assets. Limited company owners also have more opportunity to optimise their tax position compared to sole traders meaning they can reduce their overall tax liability and increase take home pay whilst remaining compliant.

If you’re looking for an expert sole trader accountant our sole trader accounting package covers all your business and personal accounting needs for only £50 + VAT per month. You will receive unlimited support, advice and guidance from your own dedicated accountant and slow turnaround times to your queries will never be an issue. We guarantee a same day response and you also receive full access to industry-standard FreeAgent cloud accounting software.

A common route for entrepreneurs and self-employed people is to start out as a sole trader. Over time they will grow their company and once it’s stable and established, they will incorporate. If this is where you’re at, our company formation service will handle the whole limited company set up process for you from start to finish.

If you have questions about which business structure is right for you, our expert team is on hand. Please call 0330 024 0406 to speak to an accountant or request a call back at your convenience here.

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