A sole trader, also known as a sole proprietorship, is a simple business structure in which one individual runs and owns the entire business. A sole trader is entitled to keep all profits after taxes have been deducted but is also liable for all losses the business incurs.
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Although many people use the term to refer to businesses that have no other employees aside from the owner, the actual definition of ‘sole trader’ refers to the legal structure of the business, rather than the number of employees. As such, while a business registered as a sole trader might only consist of the owner, it might also consist of the owner and additional employees.
Registering as a sole trader
Certain people are required to register as a sole trader with HMRC. The most common reason for registering as a sole trader is earning more than £1,000 from self-employment in the last tax year.
You’ll also need to register as a sole trader if you want to prove that you’re self-employed (for example, if you want to claim tax-free childcare) or if you want to make voluntary tax payments that help you qualify for certain benefits
How to register as a sole trader
Unlike limited companies, which are required to follow a process called incorporation, there is no specific process for registering as a sole trader. Instead, all you have to do is register as self-employed by registering for Self Assessment. The most common way to register for Self Assessment is to do it directly through HMRC’s website.
It’s recommended that sole traders register for Self Assessment as soon as possible, and you’re required to register as a sole trader no later than October 5th in your business’s second tax year. If you don’t register on time, you could be fined.
Sole traders and taxes
As a sole trader, you will become liable for paying a number of different taxes, including:
Income Tax - a tax paid on certain types of income
National Insurance - as a sole trader, you will pay Class 2 and Class 4 National Insurance
Both Income Tax and National Insurance are assessed, calculated and paid by completing a yearly Self Assessment tax return.
Sole traders and VAT
Sole traders may or may not be registered for VAT. You will be required to register for VAT if you have a taxable turnover about the VAT threshold, which is currently £85,000. However, you can also voluntarily register for VAT if your turnover is below the threshold.
When sole traders register for VAT, they become responsible for:
Charging VAT on the goods and services sold to customers
See AlsoCorporationsPaying VAT on business purchases
Submitting VAT Returns
Keeping VAT records and a VAT account.
Sole traders and unlimited liability
Within the sole trader arrangement, one person is legally responsible for all aspects of their business and are personally liable for their business finances. This is known as unlimited liability.
Unlimited liability means that there’s no legal distinction between a business’s finances and the owner’s finances. As such, while sole traders can keep any profit their business makes, they may also have to repay any debt out of their own pocket.
Unlimited liability only applies to sole traders and certain types of partnerships. Limited partnerships have limited companies and have limited liability.
Sole trader vs. self-employed
Whilst the terms ‘sole trader’ and ‘self-employed’ are often used interchangeably, they have slightly different meanings.
A sole trader is a specific business structure, whereby one individual runs and manages the whole business. However, someone is considered to be self-employed if they run their own business or do freelance work, and pay their taxes through the Self Assessment system instead of PAYE.
Although it’s very common for self-employed people to run businesses that use the sole trader structure, they may also run a partnership or be a director in a limited company. As such, a sole trader is always self-employed, but not everyone who is self-employed is a sole trader.
Sole traders and invoicing
Invoices are documents that a seller sends to a buyer. They outline the details of a specific sale and let the buyer know how much they need to pay.
When you run a business, you’ll deal with two kinds of invoices: sales invoices (which you send to customers) and purchase invoices (which you receive from suppliers). The easiest ways to create and issue sales invoices are to:
Use online invoicing software like SumUp Invoices
Use premade invoice templates for sole traders
Learn more about invoice templates for sole traders and self-employed: “Self-employed invoice templates”.
