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Sole Traders

What is a Sole Trader?

Last updated: 18 December 2023

What is a Sole Trader?

Here is a simple guide to some of the most important features of Sole Trader businesses.

Sole Trader basics

  • A Sole Trader is a type of company owned by just one person
  • Both the company and the owner can be referred to as a “Sole Trader”
  • Sole Traders may not take on partners of shareholders

Can you start a sole trader business if previously made bankrupt? 

  • Previously bankrupt individuals may need to seek court approval to either continue an existing business or to start a new venture. 
  • Concealing your identity behind a business alias isn’t permissible.
  • Be prepared to contribute a portion of your earnings back to the Official Receiver.
  • Securing credit post-bankruptcy is typically more of a hurdle to clear.

Essential facts about Sole Traders

  • As a Sole Trader, you are the company and the company is you
  • That means if the company accrues debt or goes bust, so do you
  • If the company gets sued, so do you

Sole Trader size

  • Sole traders are typically small companies because they are owned by one person willing to take on the liabilities of that business
  • Sole traders may still employ staff and open a bank account
  • There is nothing to say a sole trader can’t make large profits

How to start as a Sole Trader

  • Sole trading can be a good option if you want to test a business idea
  • A sole Trader may decide to incorporate a Limited Company at a later date
  • It can create extra work and cost if you change from a Sole Trader to a Limited Company (e.g. changing stationery / contracts)

Register your sole trader company here

When can I start trading as a Sole Trader?

  • You do not have to register as a Sole Trader until the 5th of October in your business’ second tax year 
  • You can trade whilst you wait for your Unique Taxpayer Reference number 
  • If you are working in the Construction Industry (CIS) you can work without a UTR, but you will pay more tax.

Naming a Sole Trader

  • Sole Traders can still have creative company names but often they carry the name of the owner
  • Sole Traders cannot use names that imply they are not Sole Traders (e.g. XYL Ltd or ABC PLC)
  • Sole Traders must be careful not to infringe existing intellectual property or trademarks when choosing a name

Let our free Name Genie help you come up with a name

How can I protect my Sole Trader business name?

  • Registering a Sole Trader business will not protect its name.
  • It is quite common for people who want to be a Sole Trader to register a limited company in their business name.
  • This makes sure that the name is reserved on the Companies House register so that no-one else can register the same name. It shows you have asserted your rights on the name which can be useful if you ever get involved in a trademark or passing off case. The name is also available for future use if your business grows.

See our unique reserve name service

Sole Traders and tax

  • Sole Traders still pay tax on profits
  • The Sole Trader (owner) must register with HMRC and file a Self Assessment tax return annually
  • Sole Traders must also pay tax on salaries and national insurance for employees
  • Typically, the more profit you make, the less tax efficient being a Sole Trader is

What is a UTR?

A Unique Taxpayer Reference (or UTR) number is your unique code which HMRC uses to identify you for tax purposes

You’ll need your UTR number to complete Self Assessment Tax Returns

Your UTR number is posted directly to your address in around 3-4 weeks after registration with HMRC

Sole Trader types

  • Sole Traders may work in most industries and provide most services
  • Some sectors with regulatory bodies may stipulate that you must be a Limited Company

Sole Trader privacy

  • Sole Traders can operate more privately than incorporated companies
  • Ownership and accounts must be made known to HMRC but are not held on the public register

Sole Trader maintenance

  • Sole Traders are subject to fewer statutory requirements (red tape!)
  • Sole Traders must keep their accounts up to date, but do not have to maintain a company register or submit a confirmation statement (not to be confused with a tax return)
  • Accountancy costs tend to be cheaper for Sole Traders

Do Sole Traders need to file with Companies House?

Sole traders are not required to register their business with Companies House or file any information with them. Companies House is for LTD companies only.

What’s the difference between a sole trader business and a limited company?

A limited company is a separate from its owners (unlike a sole trader who is the business). A LTD company has its own rights and obligations. It can enter into contracts, own property, and sue or be sued in its own name.

The people who own a LTD company (shareholders) don’t have to pay the company’s debts with their own money. They only risk the money they put into the company.

A limited company keeps going even if the people who own or run it change. This means the company can last a long time, passing from one owner to another.

A limited company’s structure creates a separation between ownership and management. The shareholders own the company whilst the directors manage it.

A limited company can raise cash by issuing shares. Shareholders can buy or sell their shares.

A LTD has its own tax obligations and can take advantage allowances and deductions. It’s always best to check with an accountant that this structure is best for your tax situation as usually it’s only financially beneficial once you reach a higher turnover.

Sole Trader credibility

  • Rightly or wrongly, there is a common perception that Sole Traders are not as credible or stable as Limited Companies
  • Some companies and suppliers will only do business with Limited Companies
  • This tends to be true of larger companies

Selling a Sole Trader

  • Sole Traderships can be difficult to sell or pass on. That’s because the owner is the business
  • Whilst the going concern can usually be passed on, contracts and certificates issued to the proprietor would need to be re-issued

Further reading: Everything you need to know before you register your sole trader business

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