What is the definition of a sole trader?

What is the definition of a sole trader? A fantastic method to get started as a self-employed individual.

As the name implies, when you work as a single trader, you are self-employed and run your firm on your own. Being a sole trader simply implies that the owner and the business have no legal separation.

Definition of a Sole Trader You'll be – as a sole trader. ●

Personal liability for any damages your company suffers

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Personal liability for any costs your company incurs

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Maintaining accurate records of your company's revenues and expenditures is your personal responsibility.

As a sole trader, you must pay taxes.

Sole traders must do the following in order to keep HMRC happy:

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Every year, you must file a Self Assessment tax return.

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Keep track of all of your earnings and expenses.

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Depending on your taxable income, you must pay income tax.

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In the 2020/21 tax year, pay Class 2 National Insurance Contributions (NICs) at a set rate of £3.05 per week (unless your yearly profits are less than £6,475).

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Pay National Insurance Contributions in Class 4 (NICs). Profits between £9,500 and £50,000 will be taxed at 9%, and profits over £50,000 will be taxed at 2% in the 2020/21 tax year.

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Register for VAT – but only if their gross receipts exceed the VAT threshold (or will be soon)

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As part of HMRC's Making Tax Digital (MTD) rollout, VAT registered businesses have been required to preserve digital records since April 2019.

This means that, in addition to paying your 2020/21 bill by midnight on January 31, 2021, you must additionally pay half of your total estimated tax for the 2021/22 year by the same deadline.

The remaining half of the 2020/21 tax bill is due on July 31, 2021.

What are the primary benefits of operating as a sole trader?

Many freelancers start out as sole traders because they are very easy to establish, have a low administrative burden, and have cheaper costs.

It's easy to start a business as a Sole trader.

Starting up as a sole trader is a simple three-step process: ●

Notify HMRC that you are self-employed.

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As a lone trader, you must register for Self Assessment.

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Choose a name for your company.

You can begin trading immediately after that, subject to getting any industry-specific permits you may require. You don't need to register with Companies House since, while you operate a legitimate business, it isn't a corporation.

Choosing a name for your sole trader business Any official paperwork, such as invoices, must include your company name. When it comes to naming your firm, sole traders are likewise bound by specific laws. Names of sole traders are not permitted to:

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Include the words 'limited', 'Ltd,"limited liability partnership,'LLP,'public limited company,' or 'plc.'

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Offend people.

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Be the same as a trademark that already exists.

There's also a list of "sensitive" terms and expressions that can't be used in your company name, and you can't use a name that implies a connection to any government or municipal authority without approval. Gov.uk has a handy list of what defines a "sensitive" word, as well as what names you can use and which you should avoid.

Sole traders have less administrative responsibilities.

As previously said, becoming a sole trader is simple. If you go the sole trader route, you'll avoid all of the extra paperwork that comes with forming a limited company (Annual Accounts, Corporation Tax Returns, and so on).

As a sole trader, you'll need to keep meticulous records of sales and expenses, but because you'll simply be filing a Self Assessment, it'll be a lot easier (and perhaps a VAT return).

Companies House forms, such as those to nominate or remove directors, allocate additional shares, and so on, are irrelevant to a single operator, as is the necessity to keep track of statutory registers. You'll also dodge the continual threat of IR35, as these HMRC regulations only apply to limited companies.

As a result, you'll likely spend less time on paperwork and more time earning money.

The costs of a sole trader are lower.

Because you won't need to hire a solicitor or a company formation agent when forming a sole trader (as some people do when forming a limited company), there won't be any professional costs to pay up front unless you hire an accountant right away. Because there are fewer statutory filings and reporting dates, accounting expenditures can be reduced.

You won't have to pay a registration cost to Companies House, saving you around £13.

Being a Sole trader has its drawbacks.

The largest disadvantage is limitless liability, which means that if your firm suffers losses, your personal property or belongings could be taken by your creditors.

This is possible because there is no distinction between the person running the business and the business itself in the eyes of the law. A sole trader must settle up when it comes to chasing money owed by a business. Any debts incurred by the business are the solo trader's responsibility.

Operating as a single trader can be inefficient in terms of taxes, and going limited could allow you to make more money once your earnings reach a particular level. Check out our Take-Home Pay Calculator to discover how it can affect your earnings.

Incorporation can also lead to increased employability and borrowing capacity, as banks and large corporations are often reluctant about doing business with single merchants. We have further information on the benefits of forming a limited liability corporation.

The sole trader structure is commonly preferred by new freelancers, but the limited structure is preferred by more experienced freelancers or contractors. An accountant can help you determine when the timing is perfect to convert to a limited company.

Is it best for my firm to operate as a single trader?

It depends; we've prepared an essay about the advantages and disadvantages of being a sole trader, a limited company, or an umbrella business. You should see an accountant for personalised advice on what is best for you.

If you need assistance with your sole trader books, our Cruse Burke bookkeeping software is exactly what you need. It allows you to send limitless invoices, track all of your spending, and automatically import your bank transactions, allowing you to save time and focus on your business.