Sole trading is often considered the most straightforward way of running a business. The required task of a sole trader, on the one hand, entails complete control and flexibility over any operation. At the same time, consider how to register as a sole trader in UK.
It requires the trader to take entire responsibility for failure or success, which can be pretty risky and costly. In addition, even though sole traders have not registered with companies’ houses, they must maintain accounting records, pay their income tax, and even have to file a self-assessment return with HMRC every tax year. So before diving deep into the matter of registration, we must know the importance of sole traders.
Who is the Sole Trader?
A self-employed person who is also the sole owner of the business is called a sole trader. Although many sole traders are free from the control of any shareholders or directors, they also have no other people who can shoulder the business’s liabilities.
This feature sets them aside from a limited company and a partnership. Often, sole traders are small businesses that cater to individuals or families. They prefer to hire no employees, but in exceptional cases, they employ the help of plumbers, makeup artists, etc.
Finally, before moving on to the registration process, let us have one look into the advantages as well as disadvantages of being the sole trader.
Advantages of being a sole trader
- Getting charged less by the accountant than any limited company as all they have to do is keep a record of their expenses and their invoices, after which they can send details of their profits in their yearly self-assessment return.
- Since sole trading does not involve any shareholders or partnerships, sole traders can keep all their business profits after considering tax and wages (if anyone is employed).
- Easiest set-up process. They have fewer statutory obligations than large companies.
Disadvantages of being a sole trader
- One of the major drawbacks of being a sole trader in the UK is that they have unlimited liability. Carrying the burden of all the business rates and liabilities can be extremely difficult as failing to pay off any debt might lead to the loss of personal assets, including the house traders live in.
- Difficulty in bringing in clients. Clients often prefer not to work with sole traders due to the high risks they run or the lack of a big name that other large companies can provide them.
- Have no guarantee of business continuity. In case of any accident, illness or other unavoidable reasons, the sole trader is unable to work. The burden of his responsibility cannot be passed onto anyone else as he has no partners or shareholders. This can prove to be quite a health hazard for small businesses.
Steps to register as a sole trader
Now, as sole trading is becoming popular in the UK, the most common question is How To Register As Sole Trader In UK. The process is relatively easy, but one must go through each step carefully to avoid legal problems later.
Step 1 – Understanding, when set up is required as a sole trader
When a person needs to prove they are self-employed, earn more than 1000 pounds being self-employed in an accounting year or make class 2 National Insurance payments to help qualify for benefits.
Step 2 – Register as a sole trader
- The first order of business while registering as a sole trader is contacting HMRC to inform them that we are self-employed and will be paying taxes as a sole trader.
- The HMRC will then give a self-assessment form that we need to complete and submit, either online or offline.
- Then we need to activate our HMRC online account. Once our registration form is completed, HMRC will automatically send a 10-digit Unique Taxpayer Reference and an activation code which we will require for our online account.
- Finally, we need to complete our annual self-assessment tax returns using the online account we had earlier set up.
Step 3 – Knowing the responsibilities of the sole trader
Even if being a sole trader comes with many advantages in the UK, one must not forget their responsibilities being one.
A sole trader must keep a record of all his business sales and expenses, be regular in sending their self-assessment tax returns every year, be an honest citizen and pay their income tax on their profits and class 2 and class 4 national insurance.
These were the general instructions for any sole trader. Next, we focus on some particular areas the sole traders need to take care of to finish off.
Vat– Sole traders must register for VAT if their turnover is over 85,000 pounds in the UK.
Regulations for working in the construction industry – Sole traders must register with HMRC for the Construction Industry Scheme if they are involved in the construction industry as a contractor or even a subcontractor.
Name the business – even though sole traders need not register their names but they do need to include their name or business name on official paperwork. Many choose to trade under their name or even choose a business name.
Regulations for choosing a business name – while selecting a business name, the sole trader must keep in mind the following things:
- The chosen name cannot have the words limited,ltd, limited liability partnership, LLP, or plc.
- The given name under no circumstances is offensive or derogatory.
- If the selected name is similar to an existing trademark, it is also unacceptable.
- Finally, the name cannot imply a connection with the government or other local authorities without special permission.
Conclusion
It is advised to decide between being a sole trader only after understanding the concept of being one and carefully weighing the advantages and disadvantages of sole trading.
It is all that one must keep in mind while registering as a sole trader, and the steps must be carefully carried out to avoid any hassle in the future. The sole trader should consider various key factors while understanding the risks and market scenarios.
