Plan to start your own small business or work on your own? Many people decide to work on their own. So, this makes sense. Registering as a sole trader is simple and inexpensive, making it an excellent method to experiment with self-employment.
But it’s not all sunshine and rainbows when you work for yourself. Before you can enjoy the profits you’ve worked hard to earn, you must meet your legal obligations and take care of the paperwork. Some risks come with being a sole proprietor.
Here are 8 things you need to know about becoming a sole trader and starting a business
1. If You are Self-Employed, You Are Always Considered A Sole Proprietor
HMRC will categorize you as a single trader if any of the following conditions hold:
- Own a business
- You manage it independently, sign contracts, haggle with suppliers, and hire employees in your name.
This implies that you are legally recognized as a sole proprietor when you start a business.
2. Most Sole Traders Need to Register
HMRC considers you a sole trader if you operate a business in your name, but the law mandates that you register if any of the following apply to you:
- Have you bought and sold too much? If you make more than £1,000 from your firm in a single tax year, this is the case (6 April to 5 April)
- When you ask for a loan, you might have to show that you work for yourself.
- Seeking to pay into the National Insurance System? You must do this to qualify for a state pension and other government benefits.
3. If You Don’t Register, You Could Be Fined
Have you overlooked the October 5 registration deadline? You run the chance of receiving a fine.
If HMRC determines that your failure to register was “deliberate and disguised,” the sanctions could be as high as 100% of the tax you owe. Your tax bill may also be subject to interest and a daily charge.
The great news is that you can get out of paying the fine if you:
Have a good reason for missing the deadline to sign up. This would occur if something out of your control caused you to miss the deadline.
- Tell HMRC as soon as possible if your good reason for not registering has passed, but you still haven’t.
4. Compared to Limited Companies, Sole Proprietors Have Lower Administrative Costs
This is a result of the reduced number of regulations.
It costs nothing to register as a sole proprietor. And all you need to do is phone HMRC, complete a form, or register on the HMRC website. You are not required to file your accounts similar to a limited corporation.
Since you are not a limited corporation, your accountant will likely charge you less than they would if you were.
5. Financial Documents of Sole Proprietors are Kept Confidential
Do you mind if others find out how successful your company is and how much money it generates?
Most likely, You should register as a sole trader.
HMRC must abide by privacy laws, so they can only divulge your information under specific circumstances, such as when they must comply with a court order. Thus, no one can access your financial information or self-assessment tax return unless you freely make them available.
6. Certain Industries May Not Be Suitable for Sole Proprietorships
Having a riskier business structure is also bad in another way. Some businesses may not want to collaborate with you because you are not in their field.
This is especially true in regulated industries, such as the energy sector and financial services. Here, a lot is at stake. So many businesses will want extra peace of mind with forming an LLC.
Being a sole trader can also be hard if you need a lot of money to start a business, like buying expensive equipment to make your products.
Most banks and other investors don’t like working with sole traders because running a business is risky.
7. You Must Still Maintain Accurate Records
Even though running a one-person business costs less, you still need to keep good records.
According to HMRC, invoices, receipts, and records of money coming in and leaving out must be kept for at least five years beyond the self-assessment deadline. Your records from 2021–2022 must be retained until January 31, 2028.
HMRC may at any point request to inspect your records throughout this time. If they determine that they are not “complete, correct, and readable,” you can be required to pay a fee.
Maintaining thorough, accurate, and simple-to-read records is simpler than you might have imagined. The optimal action to take is:
- For your sole proprietorship, open a separate bank account.
- Buy accounting software and connect it to your bank accounts, such as Xero or FreeAgent.
8. You May Be Required to Register For VAT
If your business is successful, you will have to register your VAT. VAT is currently only allowed up to £85,000 per year.
Once you cross the threshold, you must register. After that, you’ll have to add VAT to your client’s invoices, submit quarterly VAT forms, and transfer the funds to HMRC. The VAT you paid on items you purchased for your business may also be refunded.
This is easier than it sounds.
Most accounting programs that support Making Tax Digital can automatically add VAT to your invoices. It will also make it simple for you to submit your paperwork online and reveal how much VAT you owe HMRC or whether a refund is due.
Is sole Trade Worth it?
To summarize this blog, many people believe that operating a small business as a sole proprietor is the simplest option. Although sole proprietors are exempt from registering with Companies House, they must keep books, pay taxes, and file a self-assessment form with HMRC annually. Although you have total autonomy and control over running your business, you are also personally liable for either outcome, which can be terrifying and potentially expensive. So, it all comes down to whether you can afford to lose everything if you open another small business area.
Do you need support?
Please feel free to contact Southside Accountants in Wimbledon for any help you need on starting up your new venture.
Leave a Reply