The most common way to start a new business in the UK is as a sole trader. This is especially common among those starting out on their own for the first time. There are advantages and disadvantages of being a sole trader; today, we will focus on the advantages.
A sole trader or sole proprietor is a business owned and controlled by one person who makes all of the decisions, bears all of the responsibility, and reaps all of the profits from the business.
You are your own Boss - As a sole trader, you have complete control over your business and are, in essence, "your own boss." You are not required to consult with other directors or shareholders, consider their opinions, or compromise your own vision for the business, allowing you to develop it exactly as you see fit.
Accounting made simpler - The accounting process for sole traders is much simpler than for limited companies, as there is no need for formal Annual Accounts or a Corporation Tax Return, though you must still keep records of invoices and expenses. As a sole trader, you must file a personal Self Assessment Tax Return, which will include information about your profits from sole trading. Because there is less accounting work to be done, your accountant may charge you less than you would if you run a limited company.
Reduced Accounting Costs - Because there is less work to be done, accountants generally charge less for company accounts and advice. You only need to complete a profit and loss account rather than a balance sheet and cash flow (though you should prepare these last two on a regular basis to manage your business).
Privacy - A limited company's published accounts are open to the public, but a sole trader's financial information is kept private. This may mean that competitors have less information from which to assess your performance and identify the keys to your success. Personal information about a sole trader is also kept private, whereas information about company directors is part of the publicly accessible Companies House record.
It's quick and easy to get started - Setting up as a sole trader is still the quickest and most straightforward way to get your business up and running. Because there is no need to register a company with Companies House, there are no Companies House forms to fill out. You must still notify HMRC that you are self-employed and run your business as a sole trader.
Profit retention - As a sole trader, you keep all of the company's profits rather than having to share them with other shareholders (or leave profits in the business). Many sole proprietors opt not to hire anyone, which allows them to keep costs low and profits high. In addition to profit retention, sole traders may retain personal ownership of assets used in the business.
Making Quick Decisions - Decisions are also made quickly because it is only the owner who decides where the business is going, whether or not to take on any work, and where and when they will work. Because they are the person with whom each customer has contact, they are generally closer to their customers and can provide a more personalised approach and better customer service.
As a sole trader, you may be able to claim capital allowances on purchases of business equipment such as IT equipment, tools and machinery, vehicles, or office furniture. If you need assistance separating your work allowance from your personal allowance, please contact Personal Finance at [enquiries@personafinance.co.uk] for advice.