Posted: 27. July 2019 by: Rupert Tennant

What Is a Sole Trader?

The first step to setting up a business is to decide how it will be structured. That’s something that’s done when the company is founded with HMRC, and it will determine a few essential features of the company. The way it’s set up will reflect how it’s taxed and how it be treated when it’s sued.

The most common way to do so, when it comes to small companies is to set your business up as a sole trader. That means that your business is small and operated by you alone, which is the case for most small companies.

One-man show

Sole traders are usually seen as one-man shows meaning that the company has only one owner and therefore only one person responsible for running the company and for dealing with its financial problems if they arrive. This doesn’t mean, however, that it can have only one employee.

Sole trader businesses are able to hire just like any other company, but they can’t offer any shares or dividends as compensation for their work. All you can offer is a salary just like any other employee would get.

Financing

The main difference between a sole trader business and an LLC is in how it can be financed. When it comes to the sole trader, the government treats it as a personal asset of its owner. That means that the personal funds of the owner and the funds of the company are one of the same.

It also means that you can use your personal funds to finance the business. There’s need to borrow this way, but there are also problems with the concept since it may also require you to repay the debts of the company on your own.

The difference from an LLC

LLCs are the second most popular way to set up a company, and the difference between the two comes in the fact that an LLC is a company meaning a separate entity from the owner and their finances. LLC stands for Limited Liability Company, and that offers a clue as to how they are treated when they are in debt.

An LLC is liable for its debts only to a limited amount. When the assets of the company are sold, the company doesn’t need to pay any more even if they are still in debt. A sole trader, however, needs to pay using the personal assets of the owner as well.

Taxes

The taxes paid by a sole trader company are actually income taxes that are paid by its owner. That means that all the income made by the business is treated as if it’s a personal income made by the person running it.

This makes it simple to pay the taxes; it’s done via a return once a year. However, the downside is that this tax is progressive, meaning that it gets larger in rates the more you earn. This isn’t the case with corporation tax paid, by LLCs which is flat.

VAT

VAT is a value-added tax. It means that it’s paid on the value you add to the price of your product, meaning that it’s a tax on consumption. VAT is paid by all businesses that have a turnover higher than a threshold set by HMRC. That threshold is set at £85.000 a year at this point.

It’s rare that a sole trader business is able to earn this much within a year or even to have such a turnover. It’s possible, however, to ask to pay VAT even if you don’t really have to since, there are some refunds that only VAT payers get, and these might be worth more than a tax.

Accounting

A sole trader business is small, and their tax practices are basically the same as tax practices of an individual, but that doesn’t mean that they don’t need accountants. In fact, it’s best to hire one as soon as the company is large enough to support them.

The biggest chunk of accounting work a small company needs to do isn’t about corporate income but about payroll. That’s an easy task, but it takes up a lot of time, so you might want to hire professionals to free yourself for more important work.

Conclusion

A sole trader business is a company that has only one owner and only one shareholder, and it can’t have more than that. This means that the finances of the owner are interconnected with the finances of the business, being one of the same.

This, in turn, allows the owner to use their own fund to support the business. It also means that the business needs to pay off its debts even when they don’t have any more funds to give. That’s done from the funds of the owner.

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