A sole proprietorship, also known as a sole trader ship, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole trader does not necessarily work alone and may employ other people. They also have no limitation of liability with regards to the
Unlike with other business structures such as companies, sole traders have unlimited liability.
This means that you will be:
• Personally responsible for any losses your business makes;
• Personally responsible for any of your business' bills;
• Personally responsible for keeping accurate records of your business' sales and spending;
• Every asset of the business is owned by the proprietor, and all debts of the business are that of the proprietor.
In addition to unlimited liability, a sole trader also has to make all of the business decisions and their business would struggle if they were absent for whatever reason. Raising funds can also be difficult because you cannot, as is the case for companies, issue shares or, as is the case for partnerships, introduce a new partner to help you fund the business.
All of the profits from the business belong to the sole trader and they have full control of the business.
Sole traders are taxed under the income tax self assessment system. They are taxed on the profits generated from the business.
Sole traders should register for self assessment by the 5th of October following the end of the first tax year of trading (a tax year runs from the 6th of April in one year to the 5th of April of the next year). Information on how to do this is given on the HMRC website.
Sole traders will have to pay class 2 and 4 national insurance contributions if profits for the tax year reach a certain threshold.
Any disposals of sole trader capital assets which generate a gain in excess of the capital gains allowance are also subject to capital gains tax - these would have to be reported in the self assessment tax return for the tax year in which the gain occurred.
Other tax implications for a sole trader are the same as they would be for any other business structure:
Sole traders should be aware that they will be captured by the next phase of HMRC's Making Tax Digital initiative.
Spire Accountants will be able to assist you with the Making Tax Digital change as well as any other matters covered such as income tax, VAT, capital gains and VAT filings.
We also can relieve you of the pressure of having to maintain financial records by doing your bookkeeping for you and running your payroll.
We will also be able to advise you on a clear strategy for retaining business records so that you and your business is fully compliant with UK legislation. Outsourcing of functions such as bookkeeping and payroll does not absolve the sole trader of record keeping requirements.