We live in a rapidly moving world from one challenging event to the next. The economic conditions have exacerbated the financial pressure on consumers, and people with lower incomes could struggle to maintain their current living standards. One way to have some financial security is to diversify your revenue streams.
When setting up a new company, you must choose its business structure. There are several options, but the most popular by far is a sole trader. According to government statistics for 2021, out of the 5.6 million private sector businesses in the UK, around 75% were sole traders. This choice offers essentials for small-scale businesses or startups, but it may be challenging to determine if it is the best one for you specifically. Consulting with experts in the field, such as the chartered accountants at Howlader & co, could help you understand the various pros and cons of each different business form.
Setting up a sole trader business has less overhead
One of the main advantages is the far easier and less regulated process of setting up a business as a sole trader. Compared to a limited company, there are far fewer rules, and it is entirely free, so people can just go ahead and do it at any point they feel ready. It can be completed online, and all that is needed is for the owner of the business to be registered as self-employed with the HMRC (HM Revenues and Customs).
Having a sole trader business means you will work and get paid as an individual, which most freelancers find the most convenient option. A sole trader still has to pay tax on their profits, but overall there is a far lesser compliance burden upon them. It is important to note that sole traders planning to operate as contractors or subcontractors in the construction industry must be registered with the HMRC’s Construction Industry Scheme (CIS).
Easier to switch
If your sole trader business takes off and you start bringing in significant profits, you may wish to change its structure to that of a limited company to reduce the financial risks on your personal property and assets. Doing so would be extremely easy as all that is needed is to send an online application to Companies House. The application could be approved three working days later, and your business will now be officially recognized as a limited company. Doing this process the other way around is far more complicated. You will need to step down as the limited company’s director and then dissolve the business. When it comes to selling a business or shutting it down completely, doing it as a sole trader is far more straightforward.
You are the boss
Another major advantage of a sole trader is that you are the owner and all decisions are entirely up to you. You will not have to negotiate or convince any shareholders or directors how to run the business. This makes the entire decision process more flexible, and the company can pivot in a different direction. As the owner, you can also set work hours depending on your investment in the company. It also allows you to pick projects based on your terms.
Increased privacy
Limited companies are legally obligated to release various internal information to the public. They must submit annual filings about their accounts. In addition, directors and PSGs (People with Significant Control) must provide numerous personal details that will become publicly available via Companies House. Depending on specific conditions, the information will typically include their name, date of birth, nationality, service address, usual residential address, etc. On the other hand, the owners of a sole trader business can keep their privacy as they are under the protection of HRMC’s taxpayer confidentiality regulations.
Although a sole trader company can enjoy specific benefits over the other business types, it is also crucial to understand that there are crucial downsides. If the business concept proves viable and the company enjoys healthy growth during its first years of operation, you may want to contact professional financial advisors. The experts will take into account the business’s specific circumstances and help you decide whether switching to a limited company or a partnership will not be better suited for the company’s long-term operations.
Bottom line
There are several reasons to consider becoming a sole trader. For one, there is typically less overhead involved in setting up and running your own business as a sole trader. Additionally, it can be much easier to switch businesses if you’re unhappy with your current situation as a sole trader than if you were working for someone else. Third, when you’re the boss, you call all the shots (within reason!). This increased autonomy can be a significant perk of being a sole trader. Finally, one significant advantage of being a sole trader is increased privacy. Unless you want people to know about your business dealings, they probably won’t through public records searches.
