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UK Business Entity Types – The Sole Trader

What is a Sole Trader?

A sole trader is an unincorporated business, i.e. one not registered with Companies House. They usually have one owner who will run and work in the business on a day to day basis. A sole trader is not a company.

Assets and Liabilities of a Sole Trader

Sole traders are not seen within the law as separate from the person or people who own the business as is the case with a limited company. The assets and liabilities of a sole trader are therefore seen as those of the person owning and running the business. This not only effects the way in which the business is taxed, but also the level of exposure of the owner has to the business’ debts. The debts of the business become the liabilities of the owner whose personal property can be sought should the unincorporated enterprise be unable to pay.

Regulations of a Sole Trader

Sole traders do enjoy fewer formalities and regulations compared to those imposed on a company. There is no annual return to complete, no statutory records to maintain, no statutory accounts to prepare and no separate corporation tax return to submit. Each of these can produce cost savings to the business and therefore its owner.

Starting a Business as a Sole Trader

Starting business as a sole trader has very few requirements. There is certainly no requirement to inform Companies House (who only form and regulate companies). Revenue and Customs should usually be contacted for the purpose of notifying them that the person will now receive income from self-employment (on which they will pay income tax). VAT registration will become mandatory once the turnover threshold has been breached (currently £79,000).

Traditionally sole trader businesses have been small, local suppliers such as corner shops, builders, plumbers and so on. Whilst they are easy and inexpensive to set up, they do not enjoy limited liability status of an incorporated business, nor, as some would argue, the prestige of a registered company.