A sole trader is an individual who trades on his/her own on a self-employed basis. It is the most common legal structure and often viewed as the most simple to set up. 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.
Under sole proprietorship, the law sees the owner and the business as a single identity, which crucially means that you are personally responsible for its debts. In contrast, a limited company (the most common alternative) has its own legal identity separate from its owner; this means your liability is limited to shares in the company and any personal cash you’ve invested.
While there may be more personal financial risk as a sole trader, there are many advantages: you are in control of the business and keep the profits, it’s cheap and easy to get started, the accounting process is simpler and you can claim various allowances when you buy business assets e.g. equipment.
If you do set up as a sole trader, you’ll need to notify HMRC once you’ve started trading. You’ll need to keep hold of business records such as receipts and sales invoices, and importantly, file your annual Self Assessment tax return.
Further reading:
- How do I choose a legal structure for my business?
- Should I set up my business as a sole trader?
- Should I set up my business as a limited company?
- Sole trader or limited company?
- What taxes do small businesses pay?
