Depending on your circumstance choosing to be a sole trader can have advantages over other business structures like a Limited Company. If you’re setting up a business here are some of the benefits of choosing to become a sole trader:
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
Easy to Set Up
It’s no secret that setting up as a sole trader with HMRC is a very straight forward process that many individuals do themselves on the .GOV website, for free. You need to set up a .GOV account, fill in a form online to let HMRC you want to work for yourself and they’ll confirm they’ve processed your application in around 10 days by issuing you with a UTR number.
Forming a Limited Company requires a little more paperwork. You’ll need to set up your LTD with Companies House, appoint shareholders and Directors as well as articles of association. With the additional forms it can be helpful to use a formation company or an accountant, which has some costs.
Ready to Set Up as a Sole Trader? Follow this step-by-step guide to find out how to register and your responsibilities
As a sole trader you are required to report your income and expenses on a self assessment tax return. This can be done as single total figures if your business turnover is less than £85,000.
Accounting for Limited Companies is a more formal process where you need to produce full accounts including a balance sheet for using traditional accounting and submit them to Companies House and HMRC with a corporation tax return. Generally Limited Company owners use an accountant to handle their returns, which adds a cost to running their business.
For many sole traders, maintaining a record or income and expenses for sole traders can be done on a spreadsheet whereas a Limited Company would be better maintained on an accounting software such as Xero.
Easier to Close Down
If you’re new to self-employment, registering as a sole trader is an easy way for you to check whether it is right for you. The reporting is easier, managing your taxes is more straightforward and deregistering as self employed is almost as simple as registering if things don’t got the way you planned. Just make sure you fill any outstanding tax returns and pay any tax you owe until the date you stop working for yourself.
Closing down a Limited Company can be a bit more complicated which involves preparing final accounts, distributing any remaining funds correctly and striking it off at Companies House. Again, this may involve accountants who you’ll have to continue paying even if you are no longer working for yourself.
More Straightforward to Switch to a Limited Company
When you feel the time is right you can choose to move from sole trader to Limited Company. It means you can start out simply and then incorporate once you are sure your business works, can pay an accountant and are making enough money to benefit from the tax advantages an LTD can bring.
If you are looking to future proof your business, you can form a Dormant Limited Company to keep your name safe and file dormant accounts until you’re ready to use it – it’s a bit like saving a domain.
Taxes are Easier to Calculate
One of the biggest advantages of being a sole trader is that the tax-side of things is fairly simple meaning many who have simple affairs can DIY their taxes. As a sole trader you’ll need to pay income tax, class 2 and class 4 national insurance. You’ll fill in a tax return once a year, declare your income and HMRC will calculate how much tax you owe based on what you enter on the form.
With a Limited Company, you’ll face taxes depending on how you pay yourself, usually through a mix of PAYE salary and dividends, as well as corporation tax. Each attracts different types of tax and paperwork so you probably need an accountant to help you handle it.
If you do choose to register as a sole trader, make sure you set money aside for your tax bill. You’ll be paying your tax after you get paid so it’s important to budget for your tax bill.
Accounts Stay Confidential
Information about sole traders is kept confidential by HMRC. However Companies House make some details such as Directors names, their addresses and balance sheets publicly available on their website. Although anyone searching for information wouldn’t be able to see how much profit you are making, they’ll be able to see the net worth of your LTD.
Final Thoughts on The Advantages of Being a Sole Trader
There are some real advantages to being a sole trader. It’s a much more simple way to get started working for yourself and managing tax side of things is more straightforward. That being said, depending on your circumstances, a different business structure suit you better. For example, if you have business partners, want to get business funding or work in an industry where a Limited Company is deemed to be more acceptable by your potential clients. So make sure you do research into what’s available and seek professional advice if you are unsure whether being a sole trader is right for you.