What is a Sole Trader? The Complete Definition
A sole trader is the simplest and most common structure for individuals starting a business in the UK. It refers to a business that is owned and run by one person as a self-employed individual. The sole trader handles all aspects of the business from operations to finance. This gives the owner autonomy but also adds legal and financial liability. Here is a complete overview of what sole traders are and key things to know about this business structure.
Responsibilities of a Sole Trader
As a sole trader, you will be responsible for all business decisions and activities. This includes things like:
- Selecting a business name (you can trade under your own name or create a business name)
- Handling all business finances like invoicing, tax payments, accounts, expenses, etc.
- Complying with legal requirements such as licenses, reporting, and regulations
- Managing any staff or contractors you hire
- Marketing, selling, and providing products/services to customers
- Sourcing and purchasing any equipment, stock, or assets
- Managing premises and facilities if your business has a physical location
- Dealing with emergencies or issues that arise in the business
- A sole trader has unlimited liability for all aspects of the business. Your personal assets are not protected if the business fails or faces legal action. So financial risks need careful management.
Pros and Cons of a Sole Trader
Sole trading comes with several advantages and disadvantages:
Pros:
- Complete control and flexibility over the business
- Tax benefits as profits are taxed at your personal rate
- Easy and cheap to set up a sole trader structure
- All profits go to you directly
- Minimal paperwork or compliance needed
Cons:
- Unlimited personal liability for debts and losses
- Lack of shared decision making or accountability
- Raising investment can be difficult as you are solely responsible
- No continuity if you are unable to work due to illness etc
- Can feel isolated or overwhelmed handling everything yourself
- Steps to Becoming a Sole Trader
If starting a sole trader business sounds appealing, follow these key steps:
- Choose a business name – Will you operate under your own name or create a business name? Registering a distinct name provides more legitimacy.
- Register with HMRC – Sign up for self-assessment to handle your tax obligations. You’ll pay income tax and national insurance contributions.
- Get licenses – Acquire any necessary licenses, permits, certifications or insurance for your field. This depends on your type of business.
- Open a business bank account – This keeps your business finances organized and separate from personal money.
- Optional registration – You can register as a sole trader with Companies House for £13 if you want the additional legitimacy.
- Insure yourself – Look into public liability insurance, professional indemnity insurance, etc. to reduce risks.
- Market your business – Create a brand, website, advertising etc to promote your products/services.
- Manage finances – Keep accurate records, invoices, and bookkeeping. Use accounting software. Pay quarterly income tax.
- Comply with legal duties – Follow all laws and regulations that apply to your business activities and industry.
Key Facts About Sole Traders
To wrap up the sole trader definition, here are some key facts:
- No requirements for capital or shareholders
- Unlimited personal liability for all debts and losses
- Minimal paperwork needed for setup compared to other structures
- Profits taxed as individual income based on personal tax rate
- Can employ workers and leverage contractors
- Ceases to exist upon death or incapacitation of owner
- Ownership can be transferred but this does not bypass liabilities
- Must register for VAT if turnover exceeds £85,000
- Can offset business losses against your other personal income
- Income, expenses, tax obligations must be recorded and reported
- Who is Best Suited to Being a Sole Trader?
Given the pros and cons, certain types of entrepreneurs tend to thrive as sole traders:
- Freelancers or gig workers who work independently
- Tradespeople like builders, plumbers, electricians
- Self-employed professionals like photographers, writers, and consultants
- Online resellers, market stall owners, and mobile businesses
- Anyone wanting to test a simple business idea before expanding
- People without partners to share ownership with
- Sole trading suits businesses with lower startup costs and simplified operations. For larger enterprises with bigger financial risks or complex activities, a company structure may be better.
For microbusinesses or freelancers who want autonomy and low startup costs, being a sole trader offers major benefits and simplicity. But the risks must be fully understood. Overall it remains the number one choice for launching a small business in the UK.
Rise of Sole Traders in the UK Official data from the Office for National Statistics shows a marked increased in unincorporated sole trader businesses in the United Kingdom over the past decade. In 2021, there was 3.5 million unincorporated sole traders, up from 2.8 million in 2011 representing a 25% rise. Sole traders now account for over 59% of the UK’s total business population. This growth has been driven by more skilled freelancers and self-employed knowledge workers offering services independence. The pandemic also accelerated growth as workers struck out on their own.
Declining Share of US Self-Employed According to Bureau of Labor Statistics data, the percentage of the US workforce classified as self-employed has decreased over the past 30 years. In 1990 around 11% of workers was self-employed but in 2020 that number declined to just 6.4%. This downward trend indicates a shift away from entrepreneurship towards more traditional employment among US workers. Complex regulatory burdens and barriers like healthcare costs deter Americans from solo business ownership. But new digital platforms offer potential to reverse the decline.
Developing World Relies on Informal Sole Traders Sole proprietorships dominate developing economies lacking robust corporate infrastructure. The International Labour Organization estimates up to 70% of jobs in emerging markets are informal self-employment and sole trading. For example, India has over 60 million own account enterprises according to the Ministry of Statistics. Financial inclusion and regulatory reforms are needed to empower informal sole traders in developing countries. Technology also provides opportunities to transform sole trading.
References:
https://www.ssm.com.my/sites/default/files/guidelines/OWNER%20RESPONSIBILITY_new.pdf
http://gst.customs.gov.my/en/SiteAssets/doc/Registering%20for%20GST%20Amend%201.pdf
https://www.gov.uk/set-up-sole-trader
https://www.companieshouse.gov.uk/en/help/company-types/guidance-sole-trader
https://www.simplybusiness.co.uk/knowledge/articles/2021/11/sole-trader-meaning-and-rules/
