Starting a business at any level is incredibly tough, and that includes those who begin as smaller sole traders. At this level, it is easier for the proprietor to handle all business matters, but this changes with the speed of the operations’ growth. And at all levels, there needs to be a record of all things, financial or otherwise.
Elements such as paying taxes and filing assessment returns have to be taken on, and this includes sole trader registration. The two main institutions when it comes to registering companies and businesses of all sorts are Companies House and HMRC. The former deals only with operations that have multiple investors and the latter deals mainly with sole trader registration, according to Hoxtonmix. This body will not only allow sole traders to be recognized as legitimate operations, but also keep tabs on all their records. Before deciding to venture into the vast world of UK business alone, you would do well to understand every facet you may encounter.
Sole traders: choosing the right type
There are many ways in which aspiring entrepreneurs can choose to run their businesses. Two opposing extremes come to mind: having investors or going at it alone. Those who use the latter path are referred to as sole traders. The other style of business is limited companies. Compared to limited companies, sole traders get a few benefits and drawbacks:
When you do business alone, you enjoy the following benefits:
- Easier to get off the ground — registering a limited company is notoriously difficult due to the many forms needing to be filled; all that you need is a working idea and a registration at the HMRC, which is easier to do.
- Finances are easier to track — as a sole trader, you need to submit relatively little information to the governing body as a record of your company’s progress (as such, your accountant cannot charge obscene amounts for their services).
- All facets of the operation are kept private — because of the registration body involved, there is no obligation to reveal your information to the public; this allows you to keep the financial state of your business hidden from competitors.
- Easier to transform — based on whatever direction the enterprise chooses to take as it goes forward, it is easier for sole traders to bring in more investors; this is not the case with limited companies, where transformation is almost non-existent.
- Profits are not shared — this is the main factor that attracts people to this route. A lack of investing members means that all the profits will go to the owner.
Ironically, these also have to do with the fact that sole traders operate alone. As such, they lack the resources and protection that are provided by having additional people seated at the table:
- Potential customers are hard to win over — sole traders may offer products or services of great quality, but the public will always favor more accomplished or established entities; this particularly affects those in industries that deal with necessities such as food, medicine, and tech.
- Tax issues could arise — the amount of money you can take home from the profits is significantly larger in organizations that employ dividends; sole traders on the other hand do not, and this is due to the tax upside their limited counterparts receive.
- A possible lack of longevity — because they are essentially run by one person, any harm that befalls the said proprietor could mean that the business will come to a standstill; to compound this problem, there is no given limited time to recover before resuming operations and this could severely handicap the business.
- Future liabilities — because they fund and reap the rewards solo, sole traders also fall responsible for all losses faced; the same applies to all legal and tax issues, which could lead to financial ruin.
Because of the potential for large-scale issues, the typical entrepreneur of this sort will not partake in large-scale operations. The type of business they usually go for is smaller in scale, with a limited number of things that could go wrong.
The registration process
Registration as a sole trader is a fairly easy process, mainly because you are dealing with the HMRC. You can also do research and find extra useful information that corresponds to your business needs and requirements. This process is as follows:
- It begins with reaching out to the governing body and informing them of your business style;
- From this point, a form will be given to you and later the filled-out documents are sent back to the organization;
- They will review it and send you a code made up of 10 numbers (this code will not only be your tax reference, but a way to access your online account).
With the registration under the HMRC, you can begin to perform certain duties, such as paying your taxes and following laws concerning sole traders. This registration will only work with transparency, so it is important to reveal all financial aspects of your operation to the governing body.
Outside of this, all sole traders need to ensure as much risk prevention as possible before continuing with their project and growing it. Such measures include relatively simple decisions such as having an accountant sort your affairs and keeping your private and business accounts separate. In case things truly escalate, it is important to have insurance against such potential issues. All this is done to help grow the company smoothly into possibly becoming a limited company.