'Sole Trader' Explained

There are many things to consider when first entering the world of business. One of the biggest decisions you’ll have to make when you’re starting a business is whether to set up as a sole trader (self employed) or limited company.

Both sole traders and limited companies have their distinct advantages and disadvantages.

Whilst the professionalism and protection that comes with running a limited company is appealing to many, becoming self-employed is the more straightforward option, and with it comes a number of other benefits.

Below are some examples of the key benefits when making the choice of becoming self employed. 

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Whether it is better to work as a sole trader or set up a limited company really comes down to your own personal situation and which of the various advantages and disadvantages these two different business structures offer are more important to you.

Admin and set up

One of the biggest advantages of running your business as a sole trader is it’s relative simplicity to start and run.

Limited companies and its directors, have many more legal responsibilities and duties than someone who is operating their business as a sole trader.

When you start your business as a sole trader, you are in complete control. That means you won’t have to worry about some of the regulations limited companies have to comply with including:

  • Filing documents when a new Director is appointed or dismissed
  • Holding an AGM and keeping meeting minutes
  • Having a registered office displayed
  • Opening certain records to public inspection
  • Completing a Corporation Tax Return and paying corporation tax
  • Filing an annual Confirmation Statement  & PSC register
  • Complying with all requirements of the companies act

You will find outside VAT compliance the main filing requirement for a Sole Trader currently is to complete and file an annual Self Assessment Tax Return with HMRC.

Testing the waters

Certain businesses lend themselves to being sampled part-time before fully committing:

  • e-commerce portals can be built, tested and operated outside of regular office hours
  • A sizable number of craft fairs and food markets take place at weekends
  • Landscaping jobs can be taken on at the weekend
  • Ideas can be tested with a pop up shop 

Starting off as a sole trader is less complicated than forming a limited company from the outset for businesses that are being run part-time.

Earnings and payments

Sole Traders can simply take money out of the business as and when it’s needed. These ‘drawings’ will be treated as a salary on the Self Assessment Tax Return.

The reason for this is that there is no legal difference between the owner and the business when you are a Sole Trader. This makes things much simpler than when you are the Director of a limited company.

You must exercise caution in order to ensure that funds are available to pay whatever tax is due when the Self Assessment form is submitted.

In addition, it’s advised that formal advice is taken at least initially from a registered accountant to understand the cash flow and tax variables.


When you are a limited company the company owners and assets are considered separate to the owner’s privately owned assets. The owners (shareholders) of a limited company, therefore, can only lose a maximum of their investment in the business should things go wrong.

On the flip side, trade creditors, commercial landlords and lenders need some indication that there is enough capital in the company to absorb losses and meet commitments to them.

They may also want to gauge if the company directors are trustworthy. That is why certain information pertaining to the limited company has to be made publicly available.

Being a sole trader is different. As a sole trader, all the details of your business are kept private. For that reason if you value your anonymity, then the self employed route is the option for you.

Sole Traders will, in most circumstances, use the services of an Accountant to prepare annual accounts in order to calculate a taxable profit or loss. This figure is then included on the annual Self Assessment Tax Return, but this information is not publicly disclosed.

Personal asset insurance

There are many insurance policies that will cover the ‘unlimited liability’ risks for business owners. Insurance companies who specialise in business risks such as professional indemnity insurance and directors insurance should be able to provide you with cover as a sole trader that would bring your risk status in line with business owners who have limited liability.

Another key insurance area to consider is long term illness cover. What happens to your business interests should you become too unwell to run the business, and insurance cover can be put in place to protect against such eventuality.

Trading losses and your tax bill

In a lot of cases new businesses can struggle to make profits. A business owner might have a healthily capitalised start-up and have little or no living expenses but this is rarely the case.

Should business losses be incurred, there are options for a sole trader to set these against other income streams (current, past or future), using those losses to reduce the amount of tax they pay.

For some new business owners this ability to offset business losses could save a significant amount of tax. This is an area where professional advice may be advised. More information can be found in Tax relief for trading loss.

You can change your mind

People making the leap from employment to self-employment often choose to become sole traders initially. Moving to becoming a limited company is always possible at a later date. However, going in the opposite direction is a little more difficult, with a more formal process involved in closing the company.