If you are registered as a sole trader or freelance worker, it will mean you run your own business on an individual basis and as ‘self-employed.’ Of course, this is a status many people envy, or hope to achieve one day, due to the clear advantages of being able to have the creative freedom to work as you please.
It is important for freelance and self-employed workers to maintain a legal status and this includes being aware of and compliant with IR35 legislation.
Being in effect, the one, single employee who is also the owner of a business, does have its advantages and is often a very rewarding route to take. However, there are also challenges and hurdles that you may need to overcome and these should not be ignored.
From invoicing and chasing payments to ensuring you are tax-compliant and efficient, being self-employed is not for everyone. However, with the freelance and contractor markets busier than ever before and with the ‘gig-economy’ thriving, maintaining a compliant status when self-employed is crucial.
What is a Sole Trader?
A sole trader, sometimes referred to as a ‘sole proprietor’ refers to when only one person owns and controls the company or business in question. In practical terms, that means they are solely responsible for the profits, decisions and all responsibility of the business.
There are different types of professions that could lead one to become a sole trader. For example:
- Software developers
- Website developer
Advantages of Becoming a Sole Trader
One of the main reasons people turn to going self-employed or freelance work is because there are a number of distinct advantages to working on this basis.
Control – One of the most popular reasons for becoming a sole trader is the total control one will then have of their business. This means that not only does the person in question have complete autonomy over day-to-day operations, they also have the choice in deciding how they wish to scale the company and what direction to move forward.
Registering as a Sole Trader is Simple – Another advantage of becoming a sole trader is that setting up as one is easy. You simply need to fill in a Self-Assessment form online when registering for the first time. This then gives you access to your 10-digit Unique Taxpayer Reference (UTR). After this, you receive an activation code within 10 working days, which will enable you to fill out a tax return on a yearly basis as a self-employed worker.
Quicker Decision Making – As it is only you that makes decisions for the business, it enables you to make much faster decisions when it comes to the direction of where your business is heading. This can make things less stressful compared to if multiple people had to be consulted.
Less Regulations and Red Tape – Another benefit of being a sole trader is that there tends to be less need for you to complete much of the accounting information and forms required compared to if you are registered as a limited company. This means that when it comes to completing your self-assessment tax return each year, it is less stressful and more straightforward.
Furthermore, if you utilise the services of an umbrella company, you won’t have to worry about taking care of your taxes either as this will be accounted for.
No Staff to Manage – Only having to manage yourself, not having staff to consider is one less thing to worry about too. That brings a clear advantage in terms of the amount of money you bring home too.
As the sole trader, you will be the one who takes home all of the profits which are made by the company. You also have the added security of knowing that all your financial information is kept completely private and does not appear on Companies House online.
If you register as a limited company, this means that accounts; full or abbreviated need to be filed on a yearly basis at Companies House which is not a requirement for a sole trader.
Lower Accounting Costs – You will generally incur less accounting costs as a sole trader as there is less work for accountants to undertake, if any. All you will need to do is provide a profit and a loss account, compared to sorting out a balance sheet and cash flow account.
Disadvantages of Being a Sole Trader
Of course, whilst there are multiple benefits to working for yourself, there are pitfalls too. For some, it may be the case that I fact, setting up and running your own personal service [limited] company is the best way to go, whereas for others it may be the case that signing up with an umbrella company in the UK is a better option.
Financial Liabilities – As the sole trader with full control of the business and decisions made, should the business fail, or there is any other issue which leaves the company liable, it means the blame is solely on you and it is for you to sort out.
For example, it may be an issue with a customer becoming injured, or property being damaged. This is why it is particularly important as a sole trader dealing largely with the public to take out public liability insurance to help with such issues that may arise.
Business Stops if You Can’t Work – One of the downfalls of being a sole trader with no staff to help run the business means that you could run into financial difficulty if you end up falling ill and are unable to work, or if you are involved in an accident.
Whilst it is possible to take out critical illness insurance, this doesn’t always pay out until at least one or two months and it may not cover the level of profit your company is making at the time of illness or injury.