What is a sole trader? A small business guide

To open a small business can be very motivating if you have spent a great deal of time in a particular industry working for someone else.

Different companies have their practices, and they might not always align with your vision. If your interests are community-based and you wish to make a difference amongst people who need more pro bono work, then the motivation to open a business is in the right place. Financial freedom comes from making your own decisions and having all the profits go straight into your pocket. Still, there are pros and cons to everything in business and becoming a sole trader isn’t any different in that aspect.

sole traderIf you are exploring the option of opening your own business, you might want to consider some of the points listed below:

A sole trader by definition

A sole trader is a business owner who has no listed partners and has the business name registered to themselves. The business name could be listed as the actual owner’s name or registered as any other name not registered or affiliated to any other businesses in existence. What sets a sole trader apart from other business owners is that they do not have a set department within their companies dealing with their taxes. They are responsible for paying all their taxes over to HMRC and enlist accounting companies like DNS Associates to assist with invoices, tax returns, and business administration. The great thing about a business like this is the name doesn’t have to be registered before the initial operation date. All the profits belong to the owner once everything has been paid. There are no quarterly updates that need to be made or declared with the HMRC, and there does not have to be a specific trading address for the business to be recognised.

Funds and taxes

For a sole trader to register a business, they would need to declare earning £1000 or more within a financial year running from 5th of April to 6th of April the following year. You do not have to report any partnerships or loans you may have made personally before opening your business because those people will not be listed as partners. Still, any monies you may have received from financial institutions will need to be filed and detailed in your tax registration paperwork. You will, however, be able to keep all your profits after you have paid your taxes. To qualify for any benefits, you can make class 2 insurance payments. You can only claim VAT when dealing with other businesses with VAT-inclusive charges, and you wish to claim back money at the end of the tax year. The downside of this is that much more significant companies are reluctant to trade with sole traders because they see the trade as a risk. There is usually no fallback insurance or other partners, so being on your own can also pose a negative if you intend to grow your business.

In an event where your business closes, you will be held liable for all the cost and might even undergo asset forfeiture to recover lost funds owed to banks or small business loan institutions.

As a sole trader, you will be able to do all your paperwork on your own because all the forms and applications are readily available online or over the phone. Still, if you want to be precise about your tax return submissions, it will be best to hire an accountant. Financial advice always helps when you want to make sure that you are on the right side of the HMRC, and an accountant or financial adviser will be able to look through your paperwork and advise you about what to keep for submissions and what you do not need. Some of the papers and invoices you need to stay safe for the financial year are invoices, telephone and internet bills, stock receipts and rental agreements. These are all refundable under the right circumstances, so take your time to file them with an accountant or financial adviser’s assistance.

It can be lucrative to trade on your own when you want to open the kind of business that can make a difference in other people’s lives. Community-based small businesses thrive in sectors where the trade is simple and beneficial for both the business owner and the clients or customers to whom they want to provide services.

Business plans are beneficial for any business or company. It is essential to understand that the more information you can provide the HMRC, the better your trading chances are in the future. What started as a small business can grow into much more with the right time, advice, and dedication, so keep an open mind about the direction you want to take financially. A healthy financial record makes it easier for larger companies to invest in your business, and even if they do invest in your business, you can still trade as a sole trader. There is no need for you to rush into hiring staff and redoing the paperwork. You could employ freelancers on a contractual basis to deal with more customers and not affect the fact that you are listed as a sole trader. The possibilities for making this kind of business work are endless. Still, as long as you are always prepared to inform the HMRC about these changes when necessary, your business will survive.