What is a Sole Trader: Meaning & Definition

A sole trader is a self-employed person who is also the exclusive owner of a business. The individual is entitled to all business profits of your business after tax has been paid and is personally responsible for all losses.

While sole traders are often considered a one-man business organisation, it’s important to remember 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 he or she performs the day-to-day operations alone without hiring employees.

Sole traders run their businesses as individuals, meaning they can keep all their profits and are responsible for all the losses. Several rules apply to sole trading, including naming conventions and rules on business operations, including the requirement to register for self-assessment tax.

A sole trader business must register for a self-assessment tax return if:

• they earn more than £1,000 in a single tax year,
• need to prove that they are self-employed (e.g. to claim Tax-Free Childfree or other benefits), or
• want to make voluntary Class 2 National Insurance payments to claim tax allowances and benefits.

A business owner needs to comply with HMRC rules once they register as a sole trader, which include:

• maintaining business records and records of expenses,
• completing a self-assessment tax return annually,
• paying tax on profits and National Insurance, and
• registering for VAT once your turnover exceeds £85,000.

Self-employed construction contractors and subcontractors should also register for the Construction Industry Scheme (CIS).

Sole traders can trade under their names but cannot include the terms "limited company", "LLP", "limited", "limited liability partnership", or "plc". The name also cannot suggest a connection to the government or local authorities, may not be offensive and may not be the same as another registered business or existing trademark. 

A sole trader can trademark their business name to protect their intellectual property. 

You may be required to list this name on your business stationery or official documents. 

1. Full control

As a sole trader, you have sole ownership and full control over your business. You are your own boss. You don’t need to consult with directors or shareholders before deciding. You are entirely in charge of a wide range of business decisions - from running your operations 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, meaning you’ll be responsible for all the transactions and activities your company is involved in.

3. Continuity

Continuity relates to the point above. As there isn’t a legal distinction between the owner and the business, a sole trader depends on its owner. The company will cease to exist depending on the owner’s 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

A sole trader pays income tax - not corporation tax - on taxable business profits, and they are also required to pay Class 2 and Class 4 National Insurance contributions. They must register for VAT if their business turnover exceeds the current VAT threshold of £85,000 (for 12 months ending in 2022/23).

6. Minimal admin and filing requirements

There’s little paperwork involved with operating as a sole trader.

Besides an annual Self Assessment tax return, sole traders aren’t required to file accounts or other documents with Companies House. To fill in their tax returns, they must maintain a record of business expenses and income.

7. Privacy

Sole traders enjoy greater privacy as HMRC’s taxpayer confidentiality rules protect them. Unlike limited company directors, they are not required to provide information or publish the company’s accounts on the Companies House website.

• Freelance writers
• Virtual assistants
• Business consultants
• Plumbers
• Photographers
• Hairdressers
• Financial planners

Sole traders are critically important to the UK economy. However, many businesses start trading without understanding how much tax they must pay, which tax records to keep, and where and how to register their new business.

If you need help with your assessment, get in touch with us. We can help you make the most of your money.

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