Setting yourself up as a sole trader is a straightforward process and the simplest way to start a business. This article will give you an overview of what it means to be a sole trader and your responsibilities.
A sole trader is an individual who trades on his/her own on a self-employed basis. If you start working for yourself as a sole trader, you will own and run your business as an individual and will keep all the business's profits after taxes.
There is no legal distinction between a sole trader and his/her business. A sole trader will be:
This page takes you through the registration process.
A sole trader business is the most simplified business structure. The advantages include:
This video explains the benefits of trading as a limited company, explaining the differences between sole traders and limited companies and the various ways that a limited company can protect small business owners and inspire confidence in their businesses.
As a sole trader you will earn your income by carrying out your trade.
Your salary will be drawings which are taken out of the business. As a small business owner you should pay yourself at least enough to live on. It's also advisable to draw a regular salary - waiting to take money out only when you need it and then taking out a large amount could catch the attention of HMRC.
While you won't pay tax on any drawings taken, tax will be assessed on the profits of the business. It is vital to ensure you leave enough money to pay the tax on profits. If you think your profits for the year will be less than £43,000, then keep 20% of your total earnings aside for tax. If profits are more than this, you will need to hold over a higher percentage.
The tax due on the profit that you make (simply put, the sales that you make less your business expenses) will be reported to HMRC through self assessment. The deadline for filing your return and paying your tax will be 31 January following the tax year that your accounts fall in. You may need to make payments on account -- if you use accounting software this will calculate these for you if they are due.
Your accountant will be able to advise you on how best to take your drawings and your responsibiilties regarding paying tax.
It is your responsibility to inform HMRC once you have started trading. The deadline to do this is 5 October following the tax year in which you started trading.
You also must file your tax returns and pay your tax.
As a sole trader it is your responsibility to ensure that you keep all of your business records such as:
Books and records should be kept safely - there are rules surrounding how long business records must be stored for.
As a sole trader, you have unlimited liability. This means that you are personally responsible for the debts that the business has.
Many individuals who have traded as sole traders have had difficulty when this business fails as they have had to find the funds to pay any debt that the business has.
If you require advice regarding debt visit Business Debtline's website.
Here’s what you need to know about registering as a sole trader.Read more
If you are self-employed you will pay your tax using a self-assessment tax return. This article will give you an overview of the self-assessment process and your legal obligations as a self-employed individual.Read more
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