In our last blog post, we looked at the advantages of setting up a limited company. But here at KBL we also work with plenty of sole traders. And operating in this way comes with its own set of benefits.
Setting up as a sole trader is still the most popular way of starting up a new business in the UK. And it can be a great way for individuals to dip their toes in the business water.
So what are the pros of working in this way?
1. You are in control.
As a sole trader, you’re your own boss. You have full control of your business and don’t need to consult other directors or shareholders or compromise your vision for the company.
Because you can make decisions alone, it can be quick and simple to make changes and adapt. This ability to make speedy decisions and implement them quickly can be a key advantage for a sole trader in a competitive market.
2. You know your customer.
A sole trader usually knows their customer well. They might even attract customers simply because they are a "one-man band". Some customers, particularly those looking for personal services, may be put off by a limited company – even one that’s enthusiastic about customer service. A sole trader can build up trust and confidence based on local roots and ties. In comparison, a limited company – even one owned and run by a single person – might appear “faceless” and too “corporate” to some..
3. Its easy to get started.
While forming a limited company is far easier that it used to be, setting up as a sole trader remains the quickest way to get your business up and running. There is no need to register a company with Companies House for example. You still need to inform HMRC that you’re self-employed, however.
4. Simplified accounting.
The accounting process is much simpler for sole traders than for limited companies, with no need for formal Annual Accounts or a Corporation Tax Return. Having said that, you still need to maintain records of invoices and expenses and you must submit a personal Self-Assessment Tax Return, which will include details of profits from the trading you’ve undertaken as a sole trader.
5. Less paperwork.
As well as simplified accounting, a sole trader has fewer statutory filing responsibilities than a limited company. Limited Companies have to keep records with Companies House up to date.
6. Tax allowances on business assets and expenses.
If you need to buy equipment to operate your business, such as IT equipment, tools and machinery, vehicles or office furniture, you may be able to claim capital allowances (effectively a form of tax relief) on these purchases. Other expenses incurred in the course of the business may also be tax relievable. However, it is worth pointing out that, while these allowances may be useful, they should be set against the many tax advantages that operating the business as a limited company would offer.
7. Profit retention.
As a sole trader you retain all the profits from the business, rather than having to share them with other shareholders.
8. You retain your privacy.
While anyone can inspect a limited company’s published accounts, a sole trader’s financial information is kept private.
Remember, if you start out as a sole trader, you can always choose to form a limited company for the business at a later point. If you form a limited company at the outset and later want to operate as a sole trader, however, you’d have to go through a more formal process of closing the company first.
The right business structure will depend on your individual circumstances, and for many the advantages of a limited company will outweigh the potential benefits of operating as a sole trader.
If you want some advice on this, or any other issue concerning your accounts, call us today.