Setting up a business – are you choosing the right structure?
Let’s talk about sole traders.
You’re ready to start your new business, but have you considered how the decisions you make now will affect its growth?
One of the earliest is decision you should consider is company structure.
We look at the pros, cons, paperwork and tax associated with choosing to be a sole trader, to help you decide which is right for you.
The pros and cons of registering as a sole trader
For many who start their own business, and without huge stashes of cash, the sole trader badge is often worn by ‘one man bands’.
Professional photographers, independent hairdressers, or those in construction and business-related services for instance.
Despite the name, you are able to use staff should you so wish. You will still need to make sure you adhere to the rules and regulations of employing someone as a sole trader.
As a sole trader, any decisions you make will be instant. Ideal if you have had to convince colleagues or board members while competitors steal your market advantage in the past. More importantly, everything you make belongs to you alone (after tax).
The advantages of registering as a sole trader;
If you are not going to use anybody, you will work best as a sole trader. This is because:
1 – There are no dues or fees to register
2 – You can go straight out and order your business cards.
3 – Most new businesses are set up this way
4 – It is inexpensive
5 – There is very little in the way of red tape.
The disadvantages of registering as a sole trader
1 – Liability remains with you, not the business
The law makes no distinction between the business and its owner: liability is unlimited. Any business debt can be paid from the owner’s personal wealth if the business fails. This means anything you own could be repossessed to pay the debts.
2 – Your business cannot continue if you retire or die
The business won’t usually continue in the event of the sole trader/owner’s retirement or death.
3 – Taxes
As a sole trader, profits are taxed as income by HMRC, and as you are self-employed, your tax will be self-assessed.
You should be no worse off than you were as an employee.
You will feel better off because many expenses such as business travel and some cost of your premises, are tax-deductible. Even some costs associated with having a home office count.
4 – Register for self-assessment and file yearly returns
You will need to register for self-assessment with HMRC by 5th October following the end of the tax year, and File a tax return each year to report your earnings, but the paperwork more or less ends there.
Important – the HMRC will fine you if you fail to register by the deadline.
5 – Higher taxes when you begin to grow
It’s when the business starts to grow that the problems of being a sole trader emerge.
Since your profits are taxed as income you will be paying 40% as soon as they top £45,000 and 45% above £150,000.
Taxation is a risk, but even greater is the risk of liability.
When and why should you register as a sole trader?
If your business is a low-cost start-up and you are not likely to need to borrow to grow the business, then this may not matter too much.
It is important to remember, that as a sole trader you alone pick up the bill for any commitments made in the name of the business.
Being a sole trader can be a lonely and exposed position. The advantage of being a sole trader or ‘your own boss’ is balanced by not having anyone to confirm your path.
You are liable for debts, but also future liabilities. If you are sued you might go bankrupt: as with personal debt your assets – your house and family – are exposed.
Stay tuned for our next blog post, when we discuss becoming a limited company.