Going down the route of a sole trader is becoming a popular choice for individuals kicking off their own business. It’s a straightforward option that appeals to small business owners, freelancers, and self-employed professionals. If you're thinking about how to set up as a sole trader, it's a good idea to get a good grasp on definitions, the tax implications, and how it stands apart from other business structures.
In this guide, we’ll cover:
- What is a sole trader UK definition
- What's the difference between self-employed and sole trader?
- Sole trader vs limited company
- Sole trader examples
- What are the sole trader advantages and disadvantages
- How to register as a sole trader
- How Dojo can help
- FAQs
The definition: What is a sole trader business?
A sole trader, or sole proprietorship, is a business setup where one person runs and manages all of the operations, taking personal responsibility for any debts and legal obligations. In this structure, the business and the owner are legally the same.
Sole trading is often associated with a micro business, typically consisting of fewer than ten employees and a turnover of under £2 million – with the potential to upscale to a small business via a limited company structure – which is common in retail, trades, consultancy, and creative industries. Thanks to its simplicity, the sole trader setup is a go-to option for many up-and-coming entrepreneurs.
What's the difference between self-employed and sole trader?
While the terms 'self-employed' and 'sole trader' are often used interchangeably, they don't mean exactly the same thing. Understanding the difference can help you make the right decisions around tax, legal obligations, and risk. Here's how they compare:
| Self-employed | Sole trader | |
|---|---|---|
Definition |
A broad term for anyone who works for themselves, including sole traders, partners, and some company directors. | A specific business structure where one individual owns and runs the business. |
| Legal status | Depends on the setup – can include sole traders, partnerships, or limited companies. | No legal separation – the individual and the business are legally the same. |
| Tax responsibilities | Must manage own tax and National Insurance. | Must register for Self Assessment, file annual tax returns and expenses, and keep business records. |
| Examples | Sole traders, business partners, and directors of small limited companies. | Freelancers, independent shop owners, tradespeople, and consultants. |
Sole trader vs limited company
If you’re deciding between setting up as a sole trader or forming a limited company, understanding the key differences – especially when it comes to taxes, admin, and liability – is key. A quick look at ltd vs sole trader can help you weigh up your options.
| Definition | Self-employed | Limited company |
|---|---|---|
| Legal status | A business owned and run by one individual, with no legal distinction between owner and business. | A separate legal entity from its owners (shareholders), even if there's only one. |
| Tax responsibilities | Pays Income Tax and National Insurance through Self Assessment. | The company pays Corporation Tax on profit – owners may pay Income Tax and National Insurance on salaries and dividends. |
| Admin requirements | Relatively simple – annual tax return and basic record keeping. | More complex – requires annual accounts, tax returns, and company filings with Companies House. |
| Examples | Freelancers, independent consultants, sole operators. | Startups, growing businesses, companies planning to hire employees or raise investment. |
Sole trader examples
- Freelancers: Writers, designers, and photographers offering creative services to businesses and individuals.
- Independent consultants and coaches: Providing expert advice in fields like marketing, finance, or career development.
- Tradespeople: Plumbers, electricians, and carpenters running their own businesses or working directly with clients.
- Small shop owners and market traders: Selling goods in local communities without forming a limited company.
- Personal trainers and fitness instructors: Offering private sessions or group classes under their own name.
- Tutors and private teachers: Teaching academic subjects, music, or languages independently.Artisans and craftspeople: Making and selling handmade goods, often online or at markets.
- Mobile hairdressers and beauticians: Delivering services directly to clients at home or at events.
What are the sole trader advantages and disadvantages
Benefits of a sole trader
- Simplicity and ease of setup: Getting started as a sole trader is straightforward, with minimal paperwork and quick registration. Day-to-day operations are simpler too, with fewer accounting and tax obligations compared to running a company.
- Complete control: Sole traders make all the decisions – fast. There’s no need to consult shareholders or business partners, making it easy to adapt to changes in the market or personal circumstances.
- More privacy: Unlike limited companies, sole traders don’t have to file their accounts publicly. This means you can keep your financial information private.
- Flexibility: If you want to shift your business model or explore new opportunities, it’s a relatively simple process.
- You keep the profits: Once you’ve paid your taxes and covered your expenses, everything you earn is yours to keep.
- Simpler tax process: Sole traders report their earnings through Self Assessment, which is usually far less complicated than dealing with Corporation Tax and company filings.
What is the disadvantage of being a sole trader?
- Unlimited liability: As a sole trader, you’re personally responsible for all business debts. If things go wrong, your personal assets could be at risk.
- Limited access to finance: Compared to limited companies, sole traders can find it harder to secure loans or attract investment, which can slow down business growth.
- Perception of scale: Some clients or customers may view sole traders as smaller or less established than companies, making it harder to win bigger contracts.
- Work-life balance challenges: Since the business depends entirely on you, it can be tough to separate work from personal life – often leading to long hours and increased stress.Limited tax planning opportunities: Sole traders have fewer tax efficiencies available compared to limited companies, which can lead to higher tax bills as income rises.
- Difficulty selling the business: Because the business is tied directly to the individual, selling or transferring a sole trader business can be more difficult than selling a limited company.
How to register as a sole trader
Find out how to become a UK sole trader by following the steps below.
- Choose a business name: You can trade under your own name or create a business name. The name will need to be unique and not infringe on any trademarks.
- Register as a sole trader via HMRC: You’ll need to register for Self Assessment with HMRC, to be completed by 5 October (following the end of the tax year you started trading).
- Check if you need any licences: Depending on what you do, you might need specific licences or permits. Always check the rules for your industry.
- Set up a business bank account: It’s not a legal requirement as part of your registration as a sole trader, but having a separate account can make managing your business finances much easier.
- Arrange insurance: Make sure you have all necessary insurance in place, like public liability or professional indemnity cover, depending on your business type.
- Get your record-keeping sorted: Once you’ve completed your sole trader registration, set up a system to track your income, expenses, and invoices from day one.
- Plan for taxes: Understand your responsibilities around Income Tax and National Insurance, and start budgeting for them early.
- Create a business plan (optional): You don’t have to have one, but a clear business plan can help guide your decisions and improve your chances of securing funding later.
How Dojo can help
Getting your sole trader business up and running is a big step, and we’re here to help you make it a success. Whether you've just started researching, have actively started your sole trader registration, or are looking for ways to grow your already thriving enterprise business – Dojo offers the tools and support you need to keep moving forward.
From fast, reliable card machines to expert advice on running your business, we’re ready to help you hit the ground running. Accept card payments seamlessly as we help power your payments, boost your cash flow, and keep your business moving.
Looking for more useful tips and expert advice? Check out our blog for everything you need to build and grow your business with confidence.
