What is a Sole Trader?

A sole trader (also known as a sole proprietor or sole proprietorship) is an unincorporated business structure, and one of the simplest ways to start a business. In a sole proprietorship, one individual runs and owns the entire company. They typically have full control of how the business is run and sole autonomy when it comes to building the company’s brand.

A sole trader keeps all of the company’s profits after tax has been paid on them, rather than having to share profits with a partner. However, they also accept sole liability for paying tax on their profits. If a sole trader in the UK earns above £85,000, they must register for VAT.

A sole trader is often the only person who works for the business they have created. However, a sole trader can still have employees but when taking on members of staff, they must register as employers and register for PAYE.

People may become sole traders alongside full or part-time employment as long as all profits are reported to HMRC. As a sole proprietorship grows, it may be advantageous to restructure as a limited liability company in line with the company’s expansion. This prevents individuals from undertaking a degree of liability that would be financially crippling if their company failed or was sued.

Sole trader examples

Many smaller retailers are set up as sole proprietorships. Common examples include:

Tradespeople

These include construction workers, gardeners, landscapers, joiners and handymen. Sole traders in the construction sector should register for the Construction Industry Scheme (CIS) if working as a self-employed contractor or subcontractor.

Freelancers

Freelancers working in the digital and creative industries are often also sole traders. These include graphic designers, web designers and developers, copywriters, marketers and social media specialists.

Gig economy workers

Those who work in the gig economy are also typically sole traders, whether they manage their business alongside a day job or commit to it full time.

This includes taxi drivers, couriers, delivery drivers and tutors.

How to register as a self-employed sole trader.

Pros and cons of setting your business up as a sole trader

Being a sole trader can be advantageous because it is a business structure that is easy to set up and dismantle. Taxes are often simpler to calculate for these business structures than they are for partnerships or incorporated companies.

UK sole traders need only report their income and expenditure via a relatively simple self-assessment form, paying income tax on their profits.

Furthermore, the business owner is entitled to all of the profits the company makes after tax. However, as they are not incorporated, they lack the liability protections extended to PLCs.

Advantages

• quick and easy to set up
• you are entitled to keep all of your profits
• less administration
• lower costs

Disadvantages

• sole traders have unlimited liability
• it can be harder to raise business capital as a sole trader as you represent a greater risk
• fewer tax planning opportunities as tax is paid on income in the same year it is earned

Frequently asked questions about sole traders

How do sole traders pay their taxes?

Sole traders submit a Self-Assessment tax return to HMRC every year and pay tax on all of their profits above the tax-free threshold for that year.

How do I switch from sole proprietorship to a limited company?

In the UK, sole traders must form a limited company and notify HMRC of the change, as well as de-registering as self-employed.

Do I need a separate business bank account as a sole trader?

Not necessarily. Sole traders can still use their personal bank accounts for their business-related transactions. However, it is highly advisable to use a business bank account in order to maintain clarity when recording business transactions. It is also essential to retain receipts for all business expenses claimed.