She’s not quite right, but she’s close.

Definition

Sole Trader (Noun)

A sole trader is any self-employed person whose business and themselves are legally the same entity.

Basically if you are a sole trader then legally you are the business.

The reason that your auntie – let’s call her Doris- isn’t quite right is because you can legally employ other people to your business and still be operating as a sole trader; and to make matters more confusing it’s also possible to work for yourself and not be registered as a sole trader (I.E Registering your business as a separate entity such as a limited company).

The term sole trader only refers to the legal structure of the business and indicates that you and your business are one.

What Does This Actually Mean in the Real World

 Because you are the business you have complete control over businesses assets and profits after the tax man has taken his share but you are also held personally liable if the business becomes unable to pay up any of its outstanding debts.

Being a sole trader works for lot of people in a lot of different industries. Some examples are:

·      Gardeners

·      Plumbers

·      Electricians

·      Decorators

·      Entertainers

·      Graphic designers

·      Consultants

·      Craft makers (E.G Aunt Doris)

·      And an abundance of other clever and resourceful people

It might at times sound absolutely terrifying, but declaring yourself to HM Revenue and Customs as a Sole Trader has many advantages.

What Are the Advantages of Registering As a Sole Trader

It’s a lot simpler

Owning a Limited Company comes along with a lot of boring and confusing legal admin work like registering with companies house, filing confirmation statements, writing articles of association, the list goes on and frankly it’s a boring list.

Sole trader’s on the other hand are required to keep track of their sales and their expenses so that they can file an annual Self-Assessment Tax Return (Due January 31^st – Put it in your diary) in some cases you may also have to do a VAT Return, depending on your business. This does require some organisation skill, but considerably less than the web of declaring changing shareholders and company directors the like.

Fewer business expenses

Not only will registering as a sole trader save you time it allows you to weave your way around certain business costs; your bookkeeping might be simple enough that you fancy having a go at your own accountancy, saving you heaps of money. If you do decide to get an accountant the simplicity of your accounts as likely to save them time too and you some money.

There are also some potential tax advantages to operating as a sole trader. Should you need to buy any heavy duty machinery or a fancy new laptop for your business you may be able to claim for capital allowance, which would deduct these expenses from your companies profit, acting as a form of tax relief.

You have complete control

You’re the boss. You get to wear your big boy pants and make all the big decisions. You also get to take all the assets and profits home with you after tax because you have what’s called unlimited liability (This just means your money and the business money are the same thing). This differs from other forms of business where a much more rigorous paper trail is needed and you would have to declare and document any dividends that you pay to yourself.

Your singular control over the decision making process and a less rigorous paper trail also allow you to make business decisions far faster than potentially you could with a separate business entity. For instance, let’s say you wanted to change the price of one of your products to reflect a change in the market. You can just do it.

You get to keep your privacy

It’s a legal requirement for limited companies to publish their accounts with Companies House. In competitive industries this can put you at a disadvantage, allowing other companies in the same industry to sneak a peek at your information and give themselves a leg up. It’s also required to upload a certain amount of personal information to companies house.

No need to worry about that as a sole trader. You get to keep your special business secrets close to your chest as well as keeping your personal information more secure.

It’s easy to switch later

If the thought of starting a business is making you scratch your head or feel paralyzed with anxiety… you’re not alone. Starting as a sole trader can be a lovely, gentle beginning to what will later flourish into a huge corporate giant.

Acting as a sole trader has a less formal appearance that might suit you better if you are working part-time for someone else to make ends meet. It’s also easier to say to your current boss that you are a sole trader, than the executive CEO of BIGBIGMONEY LTD INC.

Always consider your personal circumstances before shifting to a full-time separate business entity and if possible talk to your accountant or solicitor before making the jump, if you don’t have either of them… maybe give your mum a call.

The Disadvantages of Registering As a Sole Trader

Personal Liability

This is, in my opinion, the most terrifying compelling reason against registering as a sole trader and perhaps instead biting the bullet to become company director of a private company limited by shares.

Because you have unlimited liability for your business – because you are the business- if your company messes up or ends up in debt you are personally liable to repay your debts. Not only would you lose your income but paying back money owed from assets could mean losing your house or any number of precious items you own. It is also quite possible that you might face bankruptcy.

If that makes you want to dig a hole in the ground and bury your own head… perhaps consider going down the route of starting a company limited by shares. It’s quite common for a singular company director to allocate themselves as the only shareholder and since the director decides the price of the shares it may be as low as £1 or even 1p.

In this instance if the tax man comes knocking when your company folds, he’ll be coming after your 1p share (which hopefully you can pay) and you get to keep your house.

Less prestigious

This paragraph is less worrying, but very important to consider. Giving yourself a brand and a shiny new company name can make you seem more legitimate in your particular market, make you more trustworthy and really impress people at parties when you tell them you own your own company.

Perhaps using your own name in a circle of your close peers makes you more trustworthy, relatable and in some cases artisan but it can also make you seem less professional in a wider market.

There’s a reason Coca Cola makes more money than your nephew’s 25p lemonade stand.

Pay Less Tax

An exciting reason to avoid the Sole Trader route and fly the flag of a brand new company is that there are more crafty ways to plan your tax when owning a company that gets your tax bill down.

For example, dividends for the most part are taxed at a lower rate, and because you can pay yourself as company director through the same amount of dividends as you might take out as a sole trader. You’re likely to pay less tax.

You also could choose to draw your income in a later year which may result in a tax benefit.

This is all relative to your own personal finances as well, so depending on your business it still makes more sense to be a sole trader.

It can be lonely

Collaborating can be awful, but it can be a wonderfully liberating creative process.

It can be hard to have unique ideas when you are the sole owner of a company, it is sometimes beneficial to have a fresh pair of eyes look over your work to help you mitigate the pitfalls of the business and come up with new opportunities that might make you money.

That being said, co-ownership can get very tough and you lose the ability to make all of your decisions quickly and efficiently. If you’re a control freak, potentially collaborating is not for you as you may find compromising with another equal partner leads to bitterness and resentment. Co-owned companies flourish when they work but the majority of the time they fall apart through difference of opinion.

Less access to finance

As a sole trader there is less opportunity to generate funds from external bodies. This comes back to the legitimacy of a brand and the extra protection a company from you as a business owner having a lack of privacy.

No investor wants their money to be tucked away in your pocket where they can’t see it.

Businesses also have the advantage of issuing shares to shareholders in exchange for investment in the business and sadly as a sole trader you can’t do that either because – unless you feel like giving away your kidneys – remember you are the business.

Less of a safety net

If you’re a sole trader and unfortunately you get food poisoning or get a particularly bad hangover you can’t call in sick, particularly if you are your only employee. This means potentially cancelling work and losing income. Working in a bigger company you have more continuity and it is easier to arrange work when things go wrong.

You could also die which would cause a lot of problems – not being alive probably being the biggest of those problems- for your family who may want to sell the business and that adds a lot of complications that are avoided when the business is a private entity.

Life work balance

When you are the business it’s hard to get away from work. It can be difficult separating your finances from the businesses and it can be difficult finishing work when the entire responsibility of the company rests on your shoulders.

A business structure can provide some relief and create clear boundaries that allow you to sit down and watch the football instead of worrying about your ingoing and outgoings all the time.

How Do I Register Myself a Sole Trader

Setting yourself up as a sole trader is fairly straightforward.

Tell the tax man that you’re now in business

As soon as you’ve made your first sale. You need to let HMRC know that you are self-employed from the date of your first sale. If you don’t do this, you may be fined a hefty penalty worth as much as half the tax you owed.

Register as a Sole Trader

Now that you’re self-employed, you need to register for self-assessment as a sole trader. This Is very similar to the first part but they are legally separate things.

Give yourself a New Name

The fun bit. What name are you going to put on the bottom of all your invoices. Usually it’s just a person’s name or something like Smith and Son’s Gardening services.

There are rules to this though, you can’t just choose anything.

·      It can’t have LTD, PLC, limited or any term that would indicate it was a privately owned business

·      No swear words, sensitive or offensive terms

·      It’s can’t be the same as someone else’s business (You can’t call your business Tesco for example)

·      Your name can’t pretend that you are part of a local authority, unless you have express permission to do so   

Other considerations

Depending on what business you’re operating you may have to provide other legal documentation. For example, you may have to register for VAT or if you work in construction you will have to register with the Construction Industry Scheme (CIS). It is important to look for legal advice on your specific line of work before you start trading.

Handy Bits of Information to Remember Once I’m a Sole Trader

Starting a business is only the first step there are a few important things that need be considered and maintained if the business is to run smoothly

Expenses

It’s important to keep track of your expenses so that when you file your self-assessment tax return (Deadline January 31^st) so that you can receive tax deductions for equipment, travel or general costs related to the operation of the business. Not keeping a decent record of expenses can leave you with a hefty tax bill that could be avoided.

Invoicing

You will need to keep a record of sales transactions through a document called an invoice. An invoice must contain the following pieces of information:

·      The date of the invoice

·      Your name and business name, address and contact information

·      A description of the goods or services that are being charged for

·      The dates the goods or services were provided.

·      A unique Identification Number (You can choose this, it’s so the invoice can be found a referenced at a later date)

·      VAT amount if applicable

·      The total amount owed

Tax Returns

You have to complete your self-assessment tax regularly.

National Insurance Contributions

Depending on how much money you made as a sole trader – hopefully lots of money – will depend on what class of tax you are in.

·      Class 2 National Insurance Contributions- £3.05 a week if you earn more than £6,475 a year

·      Class 4 National Insurance Contributions – 9% payable on all profits between £9,500 and £50,000 and 2% for anything over £50,000

Is Becoming a Sole Trader the Right Thing for Me

Running a business can be very stressful and becoming a sole trader allows a lot of people to own a business that is easy to control and simple to manage. It’s certainly not for everyone and there are benefits separating your business entity from you as an individual if you can bother with the extra paperwork. However, working as a sole trader is a great option for dipping toe into business if you’re starting out. 

The post What is a Sole Trader? Sole Trader Meaning appeared first on The C Suite.

Before continuing, remember to consult with your accountant before filing your claim to ensure they agree with your figures.

First check eligibility

Before claiming, make sure the employees you have furloughed are entitled to be claimed for under the HMRC scheme. There’s two essential elements to do:

• The employee isn’t working during furlough.
• The employee was on an PAYE RTI filing with HRMC on or before 19th March 2020

Even part time, zero hours, flexitime, agency and any other worker on any form of employment contract is eligible as long as they are paid using the PAYE system. This is sad news for company directors who while able to claim for the PAYE portion of their income, often earn most of their income through dividends, which are not covered.

Make an Excel Spreadsheet

Yes, I’m sorry to say it but you’ll need to do some sums. HMRC’s furlough claim website wants you to do this and just give it the raw numbers. This was likely because of the need to get a system working quickly, and creating something too complex may have meant that payments would have been delayed and businesses go bust.

You’ll need the following columns:

• Employee Name
• Employee National Insurance Number
• Employee Payroll Number (optional)
• Month
• Days in Month
• Days in Month on Furlough
• Non-Furlough Pay in that Month
• Furlough Pay in that Month
• National Insurance Threshold for the Month

How much National Insurance can I claim on the Furlough Scheme

Make a row for each employee and each month they are furloughed, and fill in the details from your payroll software.

Next create a new column called Employer National Insurance Reclaim

In this column make a formula as follows:

= ((FURLOUGHPAY+NONFURLOUGHPAY) -NATIONALINSURANCETHRESHOLD)*0.138/DAYSINMONTH*DAYSFURLOUGHED

This will work out what percentage of your national insurance contribution can be reclaimed from the government.

Be careful to accurately change the National Insurance threshold for each month in the spreadsheet, as it changed from March to April due to the new financial year. In March 2020 this was £719 per month, while in April this was £732 per month. Also check you’ve got the days in the month correct – March has 31 while April has 30.

How to work out pension contribution furlough refund

You can also claim for the mandatory employer contribution towards your pension scheme in the government’s furlough scheme, although you can not claim any additional optional contributions you make above the legal minimum.

This thankfully is a bit simpler to work out than the National Insurance contribution. You simply take the furlough wage of the employee, deduct the pension threshold amount as a proportion of the month, and multiply by 0.03.

In March the pension threshold was £512, and from April onwards this is £520.

So say you employed Sandra in March and she worked normally up until the 19th, and on 20th onwards was furloughed. You’ve worked out that her furlough pay was £700.

Then work out what the pension threshold amount for this part of the month is, so in Sandra’s case 11 of the 31 days were furlughed so divide £520 by 31, then multiple by 11 to get £184.51.

Now take that amount away from Sandra’s furlough pay, in this example £700-£184.51= £515.49. The multiply this by 0.03 leaving you with £15.46 as the pension contribution you can claim back.

Making the furlough claim

Once you’ve used the spreadsheet to calculate these numbers, making the furlough claim is easy. HMRC will check the numbers briefly and ask for a phone number if they need to clarify things, so make sure you save your calculations somewhere you’ll remember them.

You’ll also be asked for your business UTR in the process. This is easy to find online using the same HMRC logins you’ll use for the furlough claim, by logging into your main HMRC portal where you make tax returns – it is displayed on the homepage.

The money should be paid within 8 days, however we all know how uncertain things are currently be prepared that it might potentially take longer. So far reports have been good on payment times however.

Photo Attribution: Velour Noire/Shutterstock.com

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