However, a sole trader shares many characteristics with other business forms, including: You still have to report and pay tax to HMRC. We look at the process of registering as a sole trader with HMRC and your ongoing responsibilities below. If you choose to trade under a name other than your own name, you must still follow certain rules around naming your business. You must include your own name and, if different, the name of the business on business documents like invoices , letters and receipts.
You can employ staff. Being a sole trader means you bear all responsibility for the business, not that you have to work on your own. Getting started as a sole trader If you start working for yourself on a self-employed basis as a sole trader, you must register with HM Revenue and Customs HMRC , which can be done online. In another article, we look at some of the different types of business insurance that may be necessary or useful.
Any funding that might be available for the business — for example, grants or loans. Tax responsibilities As a sole trader, the income from your business is counted alongside your personal income. Other ongoing responsibilities of sole traders As a sole trader, you must maintain accounting records that follow standard accounting practice, giving a true and fair picture of the business.
Inform Direct makes it easy to manage company records, statutory books and Companies House filings. A previous version of this article was published on 19 May Idrhys Zaman says:. The terms self-employed and sole trader have slightly different definitions, but they usually go together and are often used interchangeably. Self-employed defines how you pay tax.
People who are self-employed use the self-assessment system to pay their income tax and National Insurance contributions NICs. You're not registering as a sole trader—you're registering as self-employed in order to pay tax and NICs. Although you can also be self-employed as part of a business partnership or limited company.
This means that you can also make Class 2 NICs payments, which most sole traders pay voluntarily to make sure they maintain their access to benefits. Some people want to have proof of their self-employment. For example, if they need to claim tax-free childcare, or are getting their finances in order to apply for a mortgage. Sole trader status is the simplest business structure to operate.
There are no shareholders, directors or partners to handle. You control the operation and direction of your business yourself. Of course, there are regulations to follow and liabilities to meet. There are lots of different kinds of sole traders. Some people think it's limited to those with traditional trades, like plumber, electrician, decorator and builder.
Most of us have experience of at least one sole trader business in this capacity. Freelancers of all kinds would also be classed as sole traders—like graphic designers, writers, search engine optimisation SEO experts, to name but a few.
Other services are often run by a sole trader business. This would include tutors, hairdressers, mechanic, and interior designer. Anyone who is using their skills and knowledge to provide a service is usually a sole trader. If you run an online business, you also belong on this list.
And that's an even broader spectrum, with everything from selling handmade jewellery to online consultancy.
If you decide to hire employees, there are a few things you have to do straightaway. If you're a sole trader, it doesn't mean that you have to work your business as an individual. Employees can be hired, so there is no need to set up a limited company if you're looking for workers in your business. The term 'Sole Trader' means that you are completing your business, trading as yourself under your own name.
When it comes to setting up your business name as a sole trader, there are a few rules you need to follow. The name that you choose for your business must also not contain any 'sensitive' word expressions.
They must also not suggest a connection with local authorities or the government unless you have received permission. If you want to register as a sole trader , you will need to complete a registration form via HMRC. This is, so they are aware of your new business and expect a tax return from your earnings each year.
A self-assessment tax return is used to inform HMRC of a business partner or a sole trader's annual income regarding tax and national insurance liabilities. This form needs to be filled out and completed online, then submitted to HMRC before January 31st each year.
To do this, you must fill out an SA form that takes into account other incomes such as from property, as well as the money that has been earned through working hard. Being sole traders means that you are responsible for informing HMRC of your annual income every tax year.
While standard employees get their national insurance and tax calculated for them, self-employed workers must complete a self-assessment every tax year so that HMRC can be informed and collect this owed money. Here is a step-by-step guide in how to fill out your self-assessment tax return for and how to file it before the deadline of the tax year ends:.
The answer to this question is in short, maybe. If your business sells to other VAT-registered business then you can register voluntarily. This can be a great way to reclaim any VAT that has been added within a sale.
This is only if it suits your business and will not be suitable for everyone. The answer depends on how much you know your money and taxing issues. You can also forgo an accountant in your first year of business but to keep track of the annual accounts showing the flow of cash, expenses, and benefits after your business has grown you might need a chartered accountant.
The best way to keep track of the money flow is to have a separate bank account for your personal account and business transactions. You can also claim tax free childcare. You will not need to have a registered office to get started. You are not required to register your sole trading name and can choose to use your own name or choose other options though they are certain rules to keep in mind when choosing the name. You are not allowed to include words like plc, Ltd or limited or offensive words in your sole trader name nor can you use an existing trade mark or a name linking to local authority without getting permission.
The chosen name will need to appear on all official paperwork for example professional invoices and letters. Your financial information remains private if you are a sole trader hence any business secrets and growth are kept away from competitor eyes. Your personal details are also safe from inspection as you are required to publish your accounts or make them publically accessible in the records of Companies House. You become your own boss.
You have the final say in the direction that you want your business to take. If you are thinking of becoming a sole trader there some disadvantages that you should bear in mind. Weigh them against the advantages that come with being self employed and decide what is better. Business being run by sole traders is not recognised as a separate legal entity so every business owner becomes personally liable for your business's debts and liabilities incurred. If the business does not take off or fails with debts you will lose your income and pay for debts using personal assets that are not connected to the business.
With unlimited liability you can lose valuable personal assets like your home or declare bankruptcy. If you are self employed you will pay more tax from your profits than those in limited companies would. A sole trader cannot draw dividends from their company as an employed owner of a limited company can even though the dividends are taxed at a lower rate.
It will also be impossible to save your profits in your bank account for a later year when your income or personal tax rate is low. The sole trader structure is considered more private and risky for banks and other financial organisations that you might want to access funds from. If you want to borrow money to raise your capital accounting transparency that is associated with a limited company but not a sole trader will affect the amount of cash you can be lent by banks or financial institutions.
The terms offered for you to access the loan might also differ to those offered to other companies. Sole traders might be able to access fixed rate loans but not long term finance loans or government schemes that are available for others. While you might employ people to help you run the business all the big responsibilities rest on your shoulders. With no one else to brainstorm with or bounce of ideas you are left with different roles to play for the success of your business.
These two ways of working and running yourself as a business have similar traits but are different overall. Sole traders describe their business structure. Sole traders are basically self-employed people who are the sole owner of their business.
Unlike limited companies, Sole-traders don't have to register with companies house or have a director of the company. A good example is if you're a freelance copywriter, that means you're self-employed but can be registered as a business. This applies to many different businesses, from running online shops, freelancing, or working as a self-employed electrician.
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