At the start of last year, there was a record-breaking 5.4 million private sector businesses in the UK, according to the Department for Business, Innovation and Skills (BIS). Of these businesses, 3.3 million (62%) were sole traders, 1.6 million (30%) were companies and 436,000 (8%) were partnerships.
Although sole traders make up the lion’s share of UK businesses, BIS would be the first to admit that the number of sole traders they came up with wasn’t by way of an exact science, but more of an educated guess. This is because, unlike limited companies (which are registered at Companies House) there’s no central register for sole traders.
If you’re going into business on your own – or even with a few others – starting as a sole trader could give you the edge over your limited company peers.
According to the Government themselves, setting up as a sole trader is “the easiest way to start a business in the UK.”
Looking at the requirements of setting-up as a sole trader, they’re not wrong. All you need to do is:
- Let HMRC know that you’re self-employed (be sure to have your NI number ready)
- Register for Self Assessment as a sole trader
- Pick a business name (or trade under your own name)
Subject to getting hold of any industry-specific licences you may need, you’re free to start trading immediately after that. There’s no need to register with Companies House because, although you have a bona fide business, it isn’t a company.
When setting-up as a sole trader, you won’t need to employ the services of a solicitor or company formation agent (as some people do when they form a limited company) so, unless you hire an accountant from day one, there are no professional fees to pay at the outset.
You also won’t have to pay a registration fee to Companies House, which will make you a tidy saving of about £13.
As a sole trader you’ll have to keep accurate records of sales and expenses.
You’ll also need to complete and file an annual Self Assessment tax return with HMRC but, the good news is, unlike your limited company compatriots, there is no need to file year end accounts.
All of this amounts to minimal accounting work, which spells good news for you.
Filing forms at Companies House – for example, to appoint or remove directors, allot new shares and suchlike – are irrelevant to a sole trader, as is the requirement to maintain a list of statutory registers.
So, you’ll spend less time doing paperwork and more time earning money.
So, if you’ve truly gone solo (that is, not employed by anyone else), you get to pocket all the post-tax profits from your business rather than having to distribute them to other shareholders or leave the profits in the business. You also get to hold ownership of all the assets.
If you go down the sole trader route, you’re the captain of your ship and master of your destiny.
There are no directors or shareholders to consult and no other views you need to take into account (your accountant excepted), so you can steer your ship in whichever direction you please at whatever pace suits you.
The lack of bureaucratic red tape allows you to make quick decisions – for instance, about your pricing structure or service provision – making your business agile and responsive to clients or competition, which is gold dust when competing with larger, lumbering competitors.
Also, if you’re fresh out of employment and dipping your toes in the self-employment pool for the first time, starting out as a sole trader makes it easier if you have a change of heart at a later date. As a limited company, you would have to go through the rigmarole of closing your company first.
While a limited company’s accounts and certain details about company directors are available for public inspection via a few clicks on the Companies House website, as a sole trader you are protected by HMRC’s taxpayer confidentiality rules.
Because your details are private, your rivals have less information about you, which makes it harder for them to size you up and compete with your business.
While sole trader status undoubtedly affords several advantages over limited company registration (such as ease and speed of set-up, increased flexibility, minimal accounting and admin burden) finding the right business structure for you will involve an up-close-and-personal look at your short, medium and long-term priorities.
Ready to hold your business up to a mirror?