In our short guide, we highlight the key characteristics that define a sole trader.
What is the definition of a sole trader?
A sole trader is a self-employed person who is also the exclusive owner of a business. The individual is entitled to all profits of your business after tax has been paid, and liable for all losses.
While sole traders are often thought of as a one-man business organisation, it’s important to keep in mind that the term ‘sole trader’ refers to the business structure - not the number of employees. While a sole trader trades alone and is self-employed, it doesn’t mean that he or she performs the day-to-day operations alone without hiring employees.
What are the characteristics of a sole trader?
1. Full control
As a sole trader, you have sole ownership and full control over your business. You don’t need to consult with directors or shareholders before making a decision, and are fully in-charge of a wide range of business decisions - from how your operations are run, to how you want to grow your business or use your profits.
2. Not a separate legal entity
As a sole trader, you and your business are considered one and the same. There isn’t a separate legal identity, which means that you’ll be responsible for all the transactions and activities your company is involved in.
This relates to the point above. As there isn’t a legal distinction between the owner and business, a sole trader is dependent on its owner. The company will cease to exist depending on the owner’s personal circumstances, such as death, retirement, bankruptcy or imprisonment.
4. Unlimited liability
Sole traders assume full legal responsibility for all business debts. There isn’t a limit to the maximum amount of debt a sole trader is personally liable for, and as such, your personal assets may be seized to pay for losses incurred by the business.
5. Taxed as an individual
You pay income tax - not corporation tax - on taxable business profits, and are also required to pay Class 2 and Class 4 National Insurance contributions. You’ll also need to register for VAT if your business turnover exceeds the current VAT threshold of £85,000 (for a 12-month period ending in 2021/22).
6. Minimal admin and filing requirements
There’s little paperwork involved with operating as a sole trader.
Apart from your annual Self Assessment tax return, sole traders aren’t required to file accounts or other documents with Companies House. Do note that you still need to keep a record of business expenses and income to fill in your tax returns.
As a sole trader, you enjoy a greater level of privacy as you’re protected by HMRC’s taxpayer confidentiality rules. Unlike limited company directors, you’re not required to publish your company’s accounts or details on the Companies House website.
What are examples of sole traders?
- Freelance writers
- Virtual assistants
- Business consultants
- Financial planners
Get In Touch
To book a call with one of our certified accountants, you can visit our calendar to book a FREE consultation here.