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Differences Between Self-employed and a Small Business Owner

Do you sometimes get confused as to what you call yourself in relation to running your business? Solopeneur? Self-employed? Business owner? Freelancer? Essentially, these titles all represent people who chose to earn an income independently rather than through traditional employment. While the difference between small business owners and the self-employed could be construed as subtle at first glance, they have important differentiations.

The simplest way is to differentiate between being self-employed and being a small business owner is to look at how you run your UK business. If you’re a small business owner, you run a business and often have other people working for you. In contrast, if you’re self-employed, essentially, you are the business. Nonetheless, there is some overlap between both the terms which is often the reason why they’re used interchangeably.

These distinctions can reflect on your taxes, personal liability, insurance, expenses and reporting your income to HMRC on your self- assessment tax return. Read on to learn more about the key characteristics of small business owners Vs self-employed.

Defining the self-employed

In a nutshell, self-employed means that you exclusively work for yourself. Consequently, your business doesn’t depend on others but rather, the responsibility for working when you want, creating your own products/services relies solely on you. When you’re self-employed, there is no PAYE wage, nor holiday or sick pay.

The 3 main catagories for the self-employed are:

  • Sole proprietor: a one-person business (sole trader) whereby you receive business profits as your own personal income. It also means you are liable for all your finances.
  • Partnership: similar to the characteristic of sole proprietorship in terms of no difference between the business and owners/partners, but the business shares ownership (partnership) with 2 or more people.
  • Independent contractor: this is when you create work for others but remain your own boss. In this instance, you work on a contractual basis for clients, but you are not an employee. For example, as a Freelancer.

Defining a small business owner

While all small business owners can be self-employed, not all the self-employed are business owners. They are similar in terms of being their own boss. However, as someone who runs your own business, you are characterised as having employees or hiring independent contractors. In addition, there is often a brick-and-mortar business where specific services/products are sold.

The main characteristics of a small business owner are:

  • When you have employees, it’s your responsibility to oversea taxes, holiday and sick pay, insurance and register payroll for employee(s).
  • A common structure for a small business, is limited liability company (LLC). This is usually because individuals of a business will not be personally responsible for any company debts, personal liability or obligations. This means protection for personal finances. And, they can avoid corporate taxation and filing by reporting profits and losses on their individual tax returns.
  • As a limited company you must also register with Companies House.

Paying tax for the self-employed and small businesses

The most significant difference between the self-employed Vs small business owner is how they pay taxes as the process is different for each.

As a self-employed individual, you file a self-assessment tax return each year from which HMRC calculate how much tax you need to pay. Your business profit goes through your personal account and you can choose to pay taxes quarterly, thereby avoiding a big tax bill at the end of the year.

Taxes are different for all small businesses and this depends on the business structure. For example, if you run a Limited Company, it’s not necessary to register separately as self-employed. This results in lower rates compared to corporation tax. However, you will still need to complete a self-assessment. This includes reporting your full income where you state your salary and any dividends from your company.

Both self-employed individuals and small business owners can register for VAT if their annual taxable turnover in the last 12 months or the next 30 days is greater than the VAT threshold. Therefore, if you meet this criteria, then you can register and charge for VAT.

Insurance for the self-employed and small businesses

As a self-employed person, you need to protect yourself from any potential risk that come from being your own boss. If something goes wrong, ultimately, the responsibility is down to you. This could be a cyber or data breaches, personal or business premises accident, legal action by unhappy clients or equipment theft. The type of insurance you need will also depend on the type of business you run. For example, when dealing with the general public, you will have to take out public liability insurance.

When you’re a small business owner, the above types of insurance still apply, which is also based on your particular industry. However, employees have to be protected. It’s UK law for any small business to have employers’ liability insurance in case of claims for illness or injury while at work.

While we tend to use these 2 terms interchangeably, ultimately, it usually comes down to your own personal preference, how self-employed Vs small business owner best describes your business and how you want to be perceived by your clients.