Starting a business in the UK requires entrepreneurs to choose a legal structure that best suits their needs and aspirations.
The choice of business structure can impact how a business is taxed, the level of liability and the ability to attract investment.
In the next few blogs, we will explore the four main types of business structures in the UK:
- Sole trader
- Partnership
- Limited liability partnership (LLP)
- Limited company
We will discuss the key features, advantages and disadvantages of each, to help you make an informed decision when starting your business.
Today’s blog will be focusing on sole traders.
Sole traders
Sole trading represents the simplest form of business structure.
A sole trader is often considered to be self-employed, meaning that you must register with HM Revenue & Customs (HMRC) for self-assessment as soon as you begin trading, but some sole traders do also employ others to assist them.
Sole traders pay tax through the Self-Assessment process and are, therefore, required to file a tax return every year.
If you are a sole trader, you must pay National Insurance and income tax subject to thresholds for the income your business generates.
As a sole trader, an individual is accountable for managing their business and for complying with the legal requirements expected of it.
Sole traders can keep their post-tax profits, but they also bear personal liability for any debts incurred by the business.
Advantages of sole trading
- Easy to set up – One of the biggest advantages of being a sole trader is the ease of setting up the business. There are minimal legal formalities and there is no need to register a separate company.
- Full control – Sole traders have complete control over their business decisions, without the need to consult directors or shareholders.
- Privacy – Sole traders are not required to publicly disclose their financial information.
- Lower administrative burden – There are fewer regulatory requirements and less paperwork for sole traders.
Disadvantages of sole trading
- Unlimited liability – Sole traders are personally liable for any debts or losses their business incurs, which can put personal assets at risk.
- Limited funding options – It may be more difficult to access financing compared to limited companies, as they cannot issue shares to investors.
- Potential credibility issues – A sole trader business is not usually perceived with the same level of prestige as a limited company, which could affect the clients you are wanting to attract to your business.
Operating as a sole trader can be an attractive option for those seeking simplicity, control and privacy in their business ventures.
However, it is important to weigh the advantages against the potential risks.
Need any advice navigating your finances as a sole trader? Get in touch today.