The sole trader
The most common structure for people starting out in business is that of the sole trader. A sole trader sets up on their own, using their own personal capital to get started. It is the simplest business to develop as it initially consists of one person and has very few legal formalities, obligations or constraints. A sole trader doesn't really have a formal legal structure; you work for yourself, and trade under whatever name you choose. The business has no separate legal status and it is normally used by one person businesses with no employees, although it is possible to employ others if you wish.
If you start trading as a sole trader, you are obliged to inform HM Revenue and Customs (HMRC) within three months. You are also required to pay Class 2 and 4 National Insurance contributions. All income from the business will get taxed along with your personal income and must be declared on your personal tax return.
- Easy administration. You do not need to bother with the time or cost of registering with Companies House; you just need to notify HMRC that you are a sole trader.
- No need to comply with the large amount of legislation that regulates companies.
- National Insurance contributions are usually lower than you would have to pay as a company.
- You can keep simple accounts that do not need to be prepared by an accountant.
- The owner is entitled to all the profits made by the business.
- You are personally liable for all debts. That means that if your business incurs debts, your personal assets, including your home, are at risk if you cannot repay those debts. This is often the primary reason why people decide to start a limited company.
- Fewer social security benefits
- Can be more difficult to raise finance as lenders often prefer to lend to companies or partnerships.
- Harder to sell the business or pass it down to children, as there is no separate legal entity to transfer.
- Some say that potential customers and suppliers prefer to deal with limited companies than with sole traders.