That’s fantastic news if you’re considering setting up a business! You might begin as a sole trader, as many companies do. Starting up as a sole trader is pretty easy, but it is necessary to take into consideration what this entails for you (especially in the long run).
Working for yourself or as a freelancer can be gratifying, but it is critical to set yourself up effectively. Here is everything you need to know when starting up as a sole trader such as registration, taxation, and accounting, as well as the distinction between a limited company and a sole trader.
WHO IS A SOLE TRADER?
A sole trader is an individual who operates by themselves meaning there is no barrier between them and the company, which they own and operate entirely. It is the legal term for being self-employed or running a sole proprietorship. If you wish to operate a company in the UK, you must do so through a framework. There are other choices, including setting up a limited company, partnerships, and limited liability partnerships. Trading as a sole trader implies that you are the only individual or legal entity carrying out the company.
It implies you are yourself getting into agreements, employing staff, and possibly being sued (hopefully not!). Trading as a sole trader is the most simplistic of all the arrangements, as it is free to set up and has low continuing compliance (i.e., accounting/tax) requirements. It also provides limited flexibility and legal protection, but for many small enterprises that are just getting started, it is often considered to be the best option. When the time comes, you can always convert your sole proprietorship into a limited company or another form.
SOLE TRADER VS LIMITED COMPANY:
One of the primary distinctions between a sole trader and a limited company is that as a sole trader, you are solely responsible for your firm. If you owe something or lose funds, you are personally liable. There is no distinction between personal and commercial funds. Your responsibility with a limited company is limited to the amount of money you invested into the company.
The other significant difference is just how your taxes are calculated. As a sole proprietor, you must complete a Self-Assessment tax return. In conjunction with your Self-Assessment tax return, if you run a limited company, you must file annual accounts with Companies House and pay Corporation Tax on your revenues. A limited corporation requires far more documentation than a sole proprietorship, but you may profit from less liability and higher tax efficiency.
HOW TO SET UP AND WORK AS A SOLE TRADER?
Do you want to learn how to become a sole proprietor? To pay sole trader tax, you must first apply for self-assessment. HMRC collects income tax using the self-assessment system. It is simple to apply as a sole trader online in a matter of minutes. If you haven’t already enrolled as a sole proprietor, HMRC will send you a notification with your 10-digit Universal Taxpayer Reference (UTR) & open up your account for the self-assessment online portal when you enrol.
Whilst not imperative, it could be worthwhile opening up a separate business bank account to keep track of all of your revenue and assets, and keep it separate from personal finances. The best approach is to open a transaction account that can only be used for company revenue and expenditure, and then link it to an online savings account that you can use to set away revenue to cover your taxation when the time arrives. As a general rule, put 30 percent of each transaction into your savings account.
Once your accounting entries are set up, it is strongly advised that you use sound accounting software. Sophisticated cloud solutions provide quick access to the database and do most of the hard lifting for you, such as connecting directly to your company bank accounts, handling invoicing, wage bill, and so much more. If something is too difficult or time-consuming, appoint an accountant to do that for you – it will be worth the investment in the coming years.
You’ll also have to come up with a name for your company. You have the option of trading using your own identity or a separate one. You are not required to register your name; nevertheless, you must avoid using the name of another firm or making any allusion to a limited liability company (by using terms like Ltd, LLP, plc or limited).
If you want to create your own company, one of the most crucial decisions you’ll have to make will be how to construct your company. And, if you decide to become a sole trader, it is a commitment that must be carefully considered, and you must obtain assistance from knowledgeable professionals when weighing the benefits and drawbacks of each corporate strategy.