sole trader

Deciding to start your own business is an exciting journey filled with numerous important decisions. One of the key choices you need to make is determining the legal structure for your business. Two common options for small businesses are registering as a sole trader or as a limited company. Understanding the differences between these two structures and their implications is crucial for making an informed decision. In this article, we will explore the disparities between sole traders and limited companies, as well as the various factors you should consider when choosing the right legal structure for your new business. What’s the difference between a sole trader and a limited company? As an aspiring entrepreneur, it’s vital to comprehend the fundamental distinctions between a sole trader and a limited company. Let’s take a closer look at each structure: Sole Trader A sole trader, as the name suggests, is an individual who runs a business on their own. This structure is straightforward and requires minimal legal formalities. As a sole trader, you have complete control over your business, and you are solely responsible for its operation and financial affairs. Limited Company On the other hand, a limited company is a separate legal entity from its owners. It is formed by registering the company with the appropriate government authority. Unlike a sole trader, a limited company can have multiple shareholders, and the liability of the shareholders is limited to the value of their shares. What am I liable for as a sole trader versus as a company? Understanding your liabilities is crucial when deciding between a sole trader and a limited company. Let’s examine the liabilities associated with each structure: Sole Trader As a sole trader, you have unlimited liability, meaning you are personally responsible for all the debts and obligations of your business. This implies that if your business incurs substantial debt or faces legal issues, your personal assets may be at risk. It’s important to carefully consider this aspect when evaluating the risks associated with being a sole trader. Limited Company When operating as a limited company, your liability is limited to the value of your shares in the company. This separation between personal and business assets provides a layer of protection for the shareholders. In most cases, your personal assets will not be at risk if the company faces financial difficulties or legal liabilities. How do I pay myself as a sole trader compared to a limited company? Determining how you pay yourself is an important factor to consider. Here’s a comparison of payment methods for sole traders and limited companies: Sole Trader As a sole trader, you are not considered an employee of your business. Instead, you take drawings from the profits of your business as your income. Drawings can be taken in the form of cash withdrawals or transfers from your business account to your personal account. However, it’s important to ensure you have enough funds in your business to cover your tax obligations and other expenses. Limited Company As a director and shareholder of a limited company, you can receive income in two ways: through a salary and through dividends. You can set yourself a regular salary, just like any other employee, and pay income tax and National Insurance contributions on it. Additionally, you can receive dividends from the profits of the company, which are subject to different tax rates. This flexibility allows you to optimize your tax position and potentially reduce your overall tax liability. Is being a sole trader more private than being a limited company? The level of privacy you desire for your business is another aspect to consider. Let’s compare the privacy aspects of being a sole trader and a limited company: Sole Trader As a sole trader, your business affairs are not as private as with a limited company. The details of your business, including your accounts, are not protected from public scrutiny. For example, your financial statements may need to be submitted to the government authorities and can be accessed by the public. Limited Company A limited company offers more privacy compared to a sole trader. The financial information and accounts of a limited company are not readily available to the public. Although certain details, such as annual returns and the names of directors and shareholders, are still accessible, the overall level of privacy is higher. Obligations and deadlines for sole traders and limited companies Both sole traders and limited companies have certain obligations and deadlines they need to meet. Let’s explore the obligations and deadlines for each structure: Sole Trader As a sole trader, your obligations are relatively straightforward. You are responsible for maintaining accurate financial records, filing self-assessment tax returns, and paying income tax and National Insurance contributions by the relevant deadlines. It’s important to stay organized and keep track of your financial transactions to fulfill these obligations efficiently. Limited Company A limited company has more complex obligations compared to a sole trader. You need to maintain proper accounting records, prepare annual financial statements, file an annual confirmation statement, and submit corporation tax returns. Additionally, you must comply with company law requirements, such as holding annual general meetings and maintaining registers of directors and shareholders. Missing deadlines or failing to meet these obligations can result in penalties and legal consequences. Registering your new business Before you can start operating your business, you need to register it with the appropriate government authority. Let’s explore the registration process for both sole traders and limited companies: Sole Trader As a sole trader, you are not required to register your business separately from yourself. However, you may need to register for self-assessment with the tax authorities and obtain any necessary licenses or permits depending on the nature of your business. The process is relatively simple and can be done online or by mail. Limited Company Registering a limited company involves more formalities. You need to choose a unique company name, prepare the necessary incorporation documents, and submit them to the Companies House

Different set-ups require a different way of running things, so the right choice for one business could be completely different to another, even if they offer the same services within the same sector. When you are first starting out in business, many people believe that being a sole trader is the easiest route to take, at least until the business grows. Some people who find being a sole trader beneficial are freelancers such as personal trainers, photographers, artists and hairdressers, but it depends on the circumstance. What is a Sole Trader? There are 4 main types of business structures in the UK, and each of these has different tax and liability implications: –  Sole trader. –  Partnership. –  Limited liability partnership. –  Limited company. A sole trader is a simple business structure – one individual runs and owns the entire business. They are personally responsible for the success of the business and personally liable for the finances. They keep all of the profits after taxes but they are liable if the business incurs any losses. The sole trader and the owner are seen as one entity in the eyes of the law, meaning they are responsible for any business debts or failures. Although this may sound daunting, there are many advantages to being a sole trader: It works out cheaper to set up The biggest advantage of being a sole trader is when you first start-up, the costs of doing so are significantly lower than if you were setting up as a limited company. Registering as self-employed is free as opposed to registering as a limited company. Setting up is easier than if you were a limited company When you set up as a sole trader, there are fewer legal regulations than if you set up as a limited company, which makes it quicker and easier. You work and get paid as an individual, so the only legality is to tell HMRC that you are self-employed. As long as all of your necessary licences are in place, you can then start trading. You still have to pay tax on your profits but there are fewer compliance burdens than those that work via a limited company. Increased privacy Unlike limited companies, sole traders do not have to upload their personal details to Companies House, meaning you can be private about your accounts, sensitive data and directors information. Companies House is easily accessible to the public, and many sole traders like that their competitors cannot keep tabs on them. Sole traders are protected by HMRC’s taxpayer confidentiality rules. You work for yourself Being your own boss means there are no shareholders or directors to answer to or worry about, and you have full control over how you run your business. You are free to make your own decisions when it comes to the day to day running of the business, with things such as finances, workflow, business strategy and hiring, and the decision making is much quicker. You can also set your own hours and focus on your own long-term goals without having to agree with other people. Above all, it means you get to keep all of your post-tax profits, and do not have to worry about sharing these out to shareholders and directors. You can add your own personality As a sole trader in a lot of industries, your services are not the only thing you offer a customer. Your character, quirks and all, are what sells you too. People buy into you as a person when you work in a customer facing role. Whether you’re a personal trainer or a hairdresser, run an independent shop or you’re a wedding photographer, your personality is what retains customers and is why people recommend you. Larger brands are not able to add their own stamp, which gives you the upper hand. There is less admin Because there is less regulation, it means there is less paperwork. Less paperwork means more time to run your business and less time needed on admin. Add into the mix a good accountant, and you can fully concentrate on what you do best. It’s easy to switch to a limited company If you start out as a sole trader, it is much more flexible to change over to a limited company down the line. To move from sole trader to limited company status, you send an application to Companies House and this can be approved as soon as 3 working days later. If you did things the other way around and started out as a limited company then decided to switch to a sole trader, you would have to dissolve the company first and step down as the director. If you do want to want to shut the business, you will have to do the following: –        Alert HMRC –        Settle any liabilities –        Collect money owed –        Keep or sell any physical assets and equipment –        Distribute any residual money to the owner As a sole trader, you can only sell the assets. However, with a limited company there are a lot more steps to the process, which can be complicated. You can get tax back on losses You are more likely to make a loss in your first 4 years of trading than at any other time, but if losses occur in the early days, you can set these against other income streams. This helps to reduce the amount of tax you pay. Setting up a business is a daunting process, especially if you’re a start-up coming from full-time employment. There are limits and caveats, but there is the option to carry back that loss. Early year loss claims apply in the first four years of trade. In your first years, once you’ve worked out your tax adjusted loss, you might be able to carry that loss to a prior year, where you may have been paying tax at 40%. It is worth speaking to your accountant about this, as they will be able

Making Tax Digital also known as MTD is a part of the government’s ambition. Its purpose is to be one of the most digitally advanced tax authorities in the whole wide world. When Making Tax Digital (MTD) was first announced one unique caption caught my eye. This particular headline which was ‘Making tax easier: the end of the tax retrieval’ was found in a document published in 2015. However, in 2022, I soon realized this unique caption was rather a misleading one. Now, what does MTD imply for Self-assessment taxpayers? Well, it’s pretty simple actually. From April 2024, All businesses, as well as landlords whose gross income from either self-employment or rent is greater or is equal to 10,000 pounds, will be required to keep a digital record. They will be needed to make submissions of their data to HMRC electronically. Things You Must Know About MTD ITSA Business records and data should be kept electronically. Although spreadsheets can be used, it’s more appropriate to use online accounting software and apps such as Cloud accounting software for businesses to fulfill the very first condition. Starting from April 2024, all sole traders and landlords must comply with MTD ITSA. The partnership does not need to conform until April 2025. LLP’s partnership with corporate partners will need to comply from a date that is yet to be confirmed. Hence, the date is left to decide in the future  Some Taxpayers will not be required to follow MTD. That is if their combined business and rental income is less than £10,000 in tax from the year 2022 to 2023. New and existing enterprises with a turnover that surpasses £10,000 for the first time will be needed to follow MTD from the 6th of April. For example, a new business that initiates trading in April 2024 and exceeds the turnover test on 5 April 2025 only after 12 months. Such a business will be required to follow MTD from the sixth of April 2026. An exemption will be applied for those that are digitally excluded. For example, those who do not use computers or electronics for religious reasons or those that are unable to use such electronics due to age, disability and location. Administrators, executors and trustees will also be exempted from compliance with MTD. It is to be noted that very few will be exempt from this regulation. More About Making Tax Digital Separate submission of data will be made for each business and rental type. For example, if a sole trader collects rental income from residential property and amasses income from a furnished holiday let. He /she will be required to make a total of 3 submissions of data under MTD ITSA. And if that sole trader is also enlisted for VAT, then he /she will be required to submit data under MTD VAT too. Hence the sole trader will have to submit data under both MTD ITSA and MTD VAT. Quarterly submission of data will be required. This data must be electronically submitted to HMRC. These submissions may include designatory information like national insurance numbers and financial information including sales income and expenses. For landlords, the details of their properties will be needed. The standard quarterly intervals are on normal quarter dates like the 30th of June, 30th September, 31st March and 31st December. The due date for these quarterly submissions is the fifth of August, the fifth of November, the fifth of February and the fifth of May. A fifth submission will also be required that would include the financial data as well as the taxable profit of its businesses. This would be taken after making appropriate tax and accounting adjustments. This type of submission will also include information on other things like rental or non-trading income. This may also include pension or employment income, investment income or taxable savings. Lastly, a sixth submission will also be required to ensure that all the data submitted is accurate, definitive and final. The due date for these submissions would be 31 January following the tax year-end. Due date of these tax payments will not change and will remain the same for the time being. What you should do To Prepare for MTD ITSA If you’re using accounting software to record transactions in your business then you should check. Whether it’s MTD compatible or not. If you’re not using any software then try consulting. Or take advice from your accountant to figure out which software is most suitable for you. Once you find the one that you are most comfortable with it would become easier for you to follow MTD requirements. One such software is Cloud accounting software which comes with many advantages and benefits. It is not only MTD compatible but it can also give your accountant to empower you and give you useful advice on real-time tax estimates and planning tips. If you are a landlord or small business with an income less than £150,000, then consider using a ‘cash basis’ for accounting. It is much simpler to account for expenses and income. It would also make it easier for you to compile data for submitting under MTD ITSA. If you are not required to comply with MTD, then there’s no need to worry. You just have to continue filing your self-assessment tax return as you did before. Hence, on a serious note, for some taxpayers, it is not ‘the End of the tax return. Top Tip Get help and advice from your trustee accountant to choose the best possible Cloud accounting software as well as app and get started as soon as possible. Account-ease has an entire squad which is devoted to cloud accounting and is ready to help you. Therefore, you can get advice, support as well as training from account-ease.co.uk. Which will make it easier for you to comply with the requirements of MTD.