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What Is a Sole Trader?

A sole trader is a self-employed individual that runs their business as a single person with no other additional employees. As a sole trader, there usually isn't any legal distinction between the person offering the services and the business itself. Essentially, a sole trader is their business.

Sole traders are their own bosses. They have complete control and responsibility for any profit they make, taxation and National Insurance they have to pay and for any losses they incur. The most common types of sole trader include tradespeople such as painters, decorators, plasterers, electricians and plumbers, but this extends to freelancers and consultants too. In theory, you can operate as a sole trader within any field of business. Many sole traders find work based on word of mouth recommendations or their own marketing efforts through platforms such as social media.

What Are the Benefits of Being a Sole Trader?

The main benefit of being a sole trader is that you have the freedom to choose when and how you work. You have complete control over your own business and can decide on exactly how you want to run it. As you are the only person within your company, you do not have the responsibility of managing or paying other employees. This means you keep all of the profits, and your financial records can be kept private too — they don’t need to be filed at Companies House in the same way as limited companies.

Setting up as a sole trader is also easy in terms of taxation with Inland Revenue. All you need to do is contact them to inform them you are self-employed. You must do this within the first three months of starting your business. As you are not a limited company, being a sole trader also means less paperwork in terms of accountancy and tax information. Accountancy fees will generally be cheaper as there's less work for your accountant to do in comparison to the large volumes of paperwork submitted for a limited company. When it comes to managing your taxes, you'll need to complete a self-assessment tax return to declare information about your earnings to HMRC. You can also operate under any trade name you desire — as long as you stick to copyright laws. Many people that are sole traders often trade under their own name, as they are their own workforce.

Quick business decisions are another benefit of being a sole trader. As the owner and only worker in your business, you can decide the direction you head in and how you will prioritise work. As a result, sole traders tend to forge more personable and specialist relationships with their clients, and they often spend a lot of time actively seeking new clients and building a strong client database. Likewise, if you don't want to take on a project or you don’t want to work with a certain client, you have the freedom to say no to work.

What Are the Disadvantages of Being a Sole Trader?

By law, you are liable for any debts and losses you incur as a sole trader. If you get into debt and your business runs into the red, you alone are responsible. If your business fails to launch, you risk running into debt that could put your mortgage, home, savings and other financial assets at risk. In comparison to a limited company, sole traders can find it more difficult to raise finance for business strategies such as advertising, marketing and new equipment.

Another issue with being a sole trader is that you might have to haggle with clients to get a good price for work. This can often be the case with freelancers. Some larger companies that can afford to make bulk purchases might want to keep costs low or hire cheaper workers and services, subsequently offering lower payment rates for work. A sole trader might then face the difficult decision of whether or not to take underpaid work. In some cases, it might be in their best interests to wait for better-paid opportunities.

How to Get Started as a Sole Trader

Setting up as a sole trader is arguably the easiest way to start a business. You'll need to fill in a self-assessment tax return once every quarter. This should detail all of your declared income and expenses to HMRC. Register as a sole trader as soon as you have started your business. If you don't register within the first three months of self-employment, you could be fined £100. You can register as a sole trader on the HMRC website .

If you expect a turnover of more than £85,000 per year, you will need to apply for a VAT number and will need to charge your clients VAT. You'll also need to complete VAT returns, and send the details to HMRC. You can read the government’s advice on VAT registration online . You should make sure you set up any necessary insurance or public liability that you need to operate your business, and establish an effective system for keeping accounts — or hire an accountant. Your name should be on all business documents (such as invoices). It also helps to set up an effective marketing strategy and forward plan for your business. You should build a website where customers can find details of your services. Finally, make sure you obtain planning permission or any permits you may need from your local council (depending on where you plan to run your business and if this is applicable).

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