What Is a Sole Trader? Everything You Need to Know

Categories Business AdvicePosted on
businessman holding a card with text SOLE TRADER,

There are many types of employment status in the United Kingdom. If you are considering becoming your own boss, you’ll have heard terms like limited company and PLC, self-employed worker, freelancer and sole traders. In this blog, we take a closer look at the latter: sole traders. What is a sole trader, and how does this employment status differ from other types of employment? Mint Formations covers all the important information you need to know about sole traders.

What Is the Definition of a Sole Trader Business?

A sole trader is a self-employed individual who works for themselves. They can offer products and services to other private individuals or companies, but they are not contracted as employees by another business operation. That does not mean they cannot have contracted work. You can have contract agreements as a sole trader to provide work regularly. However, that contract differs from an employment contract as you are not on their employee roster and are instead a third-party provider. In very simple terms, your services are like a software subscription a business signs up for. The business only pays the sole trader for their work — and not for the benefits of an employee such as perks, pensions and taxes.

What all this means is that sole traders must deal with HMRC directly, manage their own taxes, finances and business affairs, and hold any legal liability for the actions of their business. Sole traders — as individuals — are the business. The sole trader is responsible for making the business work through everything from setting rates to finding customers.

What Is an Example of a Sole Trader Business?

Examples of common sole trader businesses include freelance workers, plumbers, gardeners, electricians, designers and so on. The list of sole trader business types is endless because anyone can set themselves up as a sole trader and offer a product or service. As far as specific examples of what a sole trader business is, however, here are two examples.

  • Sam is a dog walker. He finds clients in his local area, charges them an hourly rate and walks their dogs.
  • Clara designs t-shirts. She’s set up an online store and sells her designs over the internet to customers around the world.

The most important distinction to make here is that both business owners are the primary entity of the business. As a sole trader, you can establish a brand around yourself, but legally, you as a person are the company. You must file self-assessment tax under your own name, for example.

What is the Difference Between a Sole Trader Business and Self-Employed?

Being self-employed is an all-encompassing term that covers all manner of work carried out outside of a traditional employment contract. Sole-traders are self-employed, as are owners of limited companies. The term self-employed simply means you do not have a typical employee position and you are responsible for your employment. Therefore, there is no difference between being self-employed and being a sole trader; the terms are synonymous. You must follow all the standard practices of being self-employed, such as filling out a self-assessment tax return for income tax and paying National Insurance, register for VAT if necessary, and so on.

What Is the Difference Between a Sole Trader Business and a Limited Company?

When you ask the question, what is a sole trader, the most important thing to be aware of is how it is essentially a self-employed status where the individual is the business. A limited company business, however, is different. A limited company is a separate legal entity. That means individuals set up a limited company, own the business and run it themselves. They are still self-employed business owners, but they are not the business and are technically an employee of a distinct company.

As an example, Clara could establish a limited company named Clara’s T-Shirts. Now Clara is no longer the registered business entity that sells her items — instead, Clara’s T-Shirts is the business. Clara owns and runs the business of Clara’s T-Shirts as employee and director.

A limited company does not need to be a large business. You can establish and register as a limited company even if you are the only employee of the business.

Advantages & Disadvantages of Being a Sole Trader

There is a reason you have a choice between registering as a sole trader and starting a limited company. Both have their advantages and disadvantages, but it’s vital to settle on the right solution for your business. So what are the advantages and disadvantages of being a sole trader?

  • Advantages of being a sole trader: Sole traders are afforded excellent flexibility for their work. With minimal admin setup (you are only really required to register as a sole trader with HMRC), you can start selling products and offering your services as a legitimate business owner. You control the business, keeping things in check and dealing with paperwork, while also avoiding a lot of the legal, registration and management responsibilities that come with owning a limited company. For example, accounting is simpler for a sole trader, as you don’t have to submit annual accounts at the end of the tax year, nor do you have to get involved with Companies House.
  • Disadvantages of being a sole trader: As a sole trader, you lack certain protections afforded to limited companies. Your business name is not a legal entity; therefore, somebody else can use your branding. If you want to protect your brand, you need to register as an LTD to protect it. You are also the legally-liable party in the case of bankruptcy and other legal disputes, whereas, in the case of a limited company, the business itself is the responsible entity, which means your personal assets are protected if the business goes bust.

Given the advantages and disadvantages of being a sole trader, sole trader enterprises are it is generally suited to small, personal companies based around a single person that move fast and provide a steady but reasonable profit. For businesses that start to expand out from this, that need the support of other people or have an increasingly complex internal structure, limited companies are often necessary as a form of personal protection at the very least, and powerful tools for management and tax savings too.

 

Got all the answers you need to the question, what is a sole trader? If you have and you are looking to take things further, Mint Formations are specialists in helping you establish your business. Whether you want to get set up as a sole trader or register a company name for your limited business, we can help.

 

Want to register your UK limited company today?


Raj co-founded Mint Formations with business partner Andy Tree in 2017. Mint formations is established to nurture small UK businesses and enable exciting new opportunities for quick growth. As a successful entrepreneur, Raj knows how to start and run a business. He currently resides as a board member of seven successful companies across the world. He is best known for founding Integra Global Solutions, specialists in robotics, automation, and business process optimisation.