With around 98% of all businesses being SMEs, it is perhaps no surprise that the preferred business structure in the UK is that of a Sole Trader. There are around 3.5 million Sole Traders throughout Britain, and there are many good reasons for it. From the ease of setting up to the lack of paperwork (compared to a Limited Company), being a Sole Trader is a practical and attractive proposition for a number of wannabe business owners.
Some Sole Traders, as they grow bigger, will evolve into a Limited Company, as they take on staff and increase their revenues. We took a look at how to change from a Sole Trader to a Limited Company, so check it out when you have an extra 5 minutes.
But, sticking with Sole Traders, let’s check out the key advantages of being a Sole Trader. Of course, there are some disadvantages too, so we’ve included these towards the end of the article.
Easy to Set-up
As we’ve previously eluded to, compared to other forms of business such as a Limited Company, setting up a Sole Trader business is relatively straight forward. Unlike with a Limited Company, there is no need to inform Companies House. You just have to let HMRC know that you are now self-employed and you’ll be earning more than £1k in a tax year. You can do this online via the government portal.
Low Start-up Capital
To do the above and register your business through HMRC is completely free. So incorporating your business has zero costs. Of course, you will need capital to invest in any equipment you need, plus we always recommend having a great accountant by your side. However, compared to a Limited company where you’re required to pay a fee to form a company, you have no such costs as a Sole Trader.
Keep personal details private
Because a Limited company has to register with Companies House, it is obliged to provide information about each of the Directors, including name, date of birth and address. Now, it is possible to bypass having your personal address registered on Companies House by using your Accountant’s address or a dedicated postal handling company. However, your name and date of birth will still be visible. With Sole Traders, this is no issue, as you are not required to provide this information. You don’t need to publish company accounts either, meaning your business and personal details are kept completely private.
You’re your own boss
This is the reason most start a business! The opportunity to have the freedom, but responsibility, to run a business how you want it to run is very appealing. You’re in charge of all decision making, so you don’t have anyone telling you what to do!
All profits go to you
Unlike with a Partnership, where you need to share the profits, as a Sole Trader you keep all money after tax. Of course, there may be a limit to how far you can grow your business without additional people involved, however for many the goal is to provide a steady personal income.
You can change your business structure later
All businesses start somewhere. Eventually though, your business goals may change. You might take on more staff, and you might want a more professional outlook for your business. No matter, you can simply change into a Limited Company. Either speak with your accountant or visit the gov.uk website to find out more.
Disadvantages of being a Sole Trader
Whilst there are undoubtedly a number of positives for becoming a Sole Trader, there are a few disadvantages that you need to be aware of before you make your final decision.
As we briefly mentioned, being a Sole Trader may not exude the right professional image. A Limited Company will give your clients the impression that you are a professional outfit. This can help your business grow as you attract more lucrative and prestigious clients.
Furthermore, unlike with Limited companies where, if you run into financial difficulties the liability stops at the company’s door, if you run into any financial difficulties as a Sole Trader your personal assets could be used to pay off any debts. This includes your car or your house. If you’re earning a certain amount, Sole traders are also not the most tax efficient. As a sole trader you will have a personal allowance of £12,500 at the time of writing which is completely tax free. Any income you receive over this amount will then be subject to tax the same way as if you were employed. However, as a Limited Company Director, you can take your earnings as Dividends, which are not subject to national insurance.
Overall, there are several great reasons to be a Sole Trader. It’s easier, quicker and gives you the freedom of making your own decisions. We recommend consulting with an Accountant before you take the plunge however, as it may be more tax efficient and financially more sensible to become a Limited Company. Why not take advantage of our free initial consultation to find out more?