Setting up as a sole trader is the most popular way of starting up a new business in the UK. Especially common amongst those going into business on their own for the first time, starting your business as a sole trader has a number of advantages, which must be set against the disadvantages of the sole trader business model and the advantages of operating your business as a limited company:
As a sole trader, you’re in full control of your business, in the ultimate sense “your own boss”. You don’t need to consult other directors or shareholders, take account of their views or compromise your own vision for the business, meaning you can develop it exactly as you choose.
2. Operational flexibility
Because you can make decisions alone, it can be quick and simple to make changes to the business to adapt to changing circumstances. So, for example, you can change your pricing structure or change the products that you offer, adding new products or removing those you don’t have faith in. This ability to make swift decisions and implement them quickly can be a key advantage for a sole trader in a competitive, quickly changing market.
As well as being the sole decision maker, a sole trader will generally be close to their customers. They can therefore be sensitive to the needs of their clients, attuned to their needs and able to react quickly and decisively to them.
Some customers, particularly those looking for personal services, may be put off by a limited company – even one that’s enthusiastic about customer service. This may apply particularly in services provided locally, where a sole trader can build up trust and confidence based on local roots and ties. In comparison, a limited company – even one owned and run by a single person – might appear “faceless” and too “corporate” to some.
3. Quick and simple to get started
While forming a limited company is far easier that it used to be, setting up as a sole trader remains the quickest and simplest way to get your business up and running. There is no need to register a company with Companies House, so no Companies House forms to complete. You still, however, need to inform HMRC that you’re self-employed, operating your business as a sole trader.
4. Low setup costs
Many people employ the services of a formation agent or solicitor when forming a limited company (although it’s easy enough to start a company on your own). As there’s usually less of a need for professional advice when becoming self-employed as a sole trader, these costs are at least reduced (if not eliminated entirely). There are also no fees to pay to Companies House when setting out as a sole trader.
You’re also unlikely to need much capital to get the business going and operate it in the early days, although that very much depends on what type of work the business will do – in some industries, the operating costs are high regardless of the legal form of the business.
5. Simplified accounting
The accounting process is much simpler for sole traders than for limited companies, with no need for formal Annual Accounts or a Corporation Tax Return, although you’ll still need to maintain records of invoices and expenses. As a sole trader you must submit a personal Self-Assessment Tax Return, which will include details of profits from the trading you’ve undertaken as a sole trader.
Because there’s less accounting work to undertake, your accountant may well charge you less than if you operated a limited company.
6. Fewer statutory obligations
As well as simplified accounting, a sole trader has fewer statutory filing responsibilities than a limited company. There’s no need to file an Annual Return, and a whole host of Companies House forms that a limited company may occasionally need to file – when appointing or removing directors and allotting new shares, for example – are irrelevant to a sole trader.
Fewer statutory obligations mean less contact with regulatory bodies and, important for many, less paperwork. In particular, a sole trader is not required to maintain the suite of statutory registers that a limited company must keep.
7. Tax allowances on business assets and expenses
If you need to buy equipment to operate your business, such as IT equipment, tools and machinery, vehicles or office furniture, you may be able to claim capital allowances (effectively a form of tax relief) on these purchases. Other expenses incurred in the course of the business may also be tax relievable.
However, while these allowances may be useful, they should be set against the many tax advantages that operating the business as a limited company may confer.
8. Profit retention
As a sole trader you retain all the profits from the business, rather than having to share them with other shareholders (or leave profits in the business). Many sole traders choose not to employ anyone, which can keep costs low and maximise profits available to them.
As well as profit retention, sole traders may also retain personal ownership of assets used in the business.
While anyone can inspect a limited company’s published accounts, a sole trader’s financial information is kept private. That may mean that competitors have less information from which to see how you’re faring and identify the secrets of your success.
A sole trader’s personal details also remain private, whereas certain details relating to company directors forms part of the publicly accessible Companies House record.
10. It’s easier to change your mind
People starting out on their own in business for the first time often do so on a part-time basis, perhaps remaining employed so they retain the security of a salary. Many people in that position, dipping their toe into the water of running a business, will choose to do so as a sole trader, waiting until they have more confidence in the business and its ability to support them and their family before deciding whether a limited company might work better. With its less formal appearance, operating a separate business as a sole trader might also be easier to explain and justify to your current employer than forming a limited company for the same purpose.
If you start out as a sole trader, you can always choose to form a limited company for the business at a later point. If you form a limited company at the outset and later want to operate as a sole trader, however, you’d have to go through a more formal process of closing the company first.
The right business structure will depend on your individual circumstances, and for many the advantages of a limited company will outweigh the potential benefits of operating as a sole trader. There are also disadvantages to operating as a sole trader, which you should consider. Professional advice from an independent professional who knows your circumstances, such as your accountant or solicitor, is always useful if you’re unsure how best to set up a new business.
For any help with the structure of your business, running the accounts or just a general chat about whether you are doing things correctly please contact Hetty Verney Accounting on 01285 770050 or click the link to check out the website.