In this episode of the "I Hate Numbers" podcast, we explore The Benefits of Operating as a Sole Trader for your business. While limited companies have their perks, operating as a sole trader can offer flexibility, autonomy, and ease of set-up. Listen to learn more.

If you're starting a business and trying to decide on its legal structure, it's essential to consider the benefits of operating as a sole trader. In this episode of the "I Hate Numbers" podcast, we'll take a closer look at why being a sole trader can be an excellent option for small businesses.

Ease of Set Up:

One of the most significant advantages of being a sole trader is the ease of setting up your business. Compared to forming a limited company, the formalities are relatively light-touch, and the process is generally more straightforward. This simplicity can save you time, effort, and money in the long run.

Flexibility:

Another advantage of being a sole trader is the flexibility it offers. As a sole trader, you have the autonomy to make decisions independently, without the need to consult other directors or shareholders. This flexibility allows for a quicker response to changing market conditions and can give you an edge over your competitors.

Privacy:

One of the biggest benefits of operating as a sole trader is the privacy it offers. Unlike limited companies, sole traders have a greater degree of privacy, and only HMRC is entitled to look at your accounts. This privacy can be especially important if you're running a home-based business or if you're in a sensitive industry.

Tax:

Tax is often cited as a reason to form a limited company, but this isn't always necessary. Many people who incorporate become companies when it's not necessary,  Furthermore, it can be more expensive than operating as a sole trader. As a sole trader, you can take advantage of tax deductions, and it's often simpler to manage your tax affairs.

Migration to a Limited Company:

If you decide to start as a sole trader, you're not locked into that legal structure forever. It's possible to migrate to a limited company when the time is right and when circumstances dictate. Starting as a sole trader can give you the freedom to test your business idea before committing to a more complex legal structure.

Conclusion:

In conclusion, while limited companies have their advantages, operating as a sole trader can offer significant benefits,  This includes flexibility, autonomy, ease of set-up, privacy, and tax advantages. If you're starting a small business, it's essential to consider all the options available to you and choose the legal structure that best suits your needs.  Check out our range of calculators

Now, let’s talk about the fabulous resources we’ve cooked up for you.  Our clients have their own client portal (think of it as your secret recipe book) with a Tax Return Checklist.

Fancy tapping into some extra FREE I Hate Numbers resources about UK tax and business, you have blogs,  videos and podcasts to browse through.

We offer professional tax and accounting services to individuals and businesses.  Furthermore. contact us today for help and support on tax, accounts, and managing business finances.

There are many benefits to being a sole trader, and it's not just in tax terms. In this week's I Hate Numbers Podcast, I'm going to outline the benefits of being a sole trader. I'll also comment on the drawbacks to being a sole trader, talk in terms of where the main advantages are, talk about that point when perhaps we should consider being a company, and showing some tips with you along the way.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks. Welcome to another weekly episode of I Hate Numbers. This is the podcast that has got a mission to help you make more money in your business to increase the level of financial awareness and literacy that you have, to help you win more battles than you lose, for what goes on between your ears, for you to save tax, save time, and have the business you aspire to.

A pretty good combo if you ask me. Now, choosing the right business structure is critical for any business, any entrepreneur in the United Kingdom and around the world. I'm going to be focusing most of my comments onto the United Kingdom, but there are lessons we can take away from this for the rest of the world outside the United Kingdom.

Limited companies have that kudos attached to them. I think there's a large amount of snobbery and a large amount of thumbing noses up at sole traders, and I think that's a very old fashioned and a very arrogant attitude to adopt. Now, limited companies have their advantages, but operating as a sole trader

also offers immense benefits as well. Now, one of those advantages is the relative simplicity and flexibility as operating as a sole trader. Now, just as a jargon alert here, by the way, when we talk about sole traders, we're talking about an individual who's classified as the proprietor of that business.

Sole traders can still engage staff, take on freelancers, and have staff under PAYE, but the actual ownership, and I use that in a very loose sense of the word, is down to one individual. Now, the formalities in terms of starting up that business is relatively light touch. You have to complete a form and register with HMRC in the United Kingdom. Unless you are planning to use a name that conflicts with anybody else,

there's no legal requirement to register that name. There's no contracts of employment that you have to draw up between yourself and your business, and the admin tasks in terms of filing accounts to Companies House, any statutory register are not necessary. So, the amount of compliance work, the amount of regulation that governs sole traders is much less, and that's going to be a great thing,

certainly, for a business that is starting on its business journey. The ease of setting up, the costs of formation are quite negligible, and once you've done that, a few bits of filling in forms, up and away you go. So, that complex procedures are not going to weigh down heavily. You can make your decisions independently.

You don't need to consult with other directors or shareholders. You are the boss. You are the one who's going to make that ultimate final decision. So, that ease of response, that speed of response to changing conditions is much easier as a result. A second reason for recommending a sole trader structure is the privacy and autonomy that attaches to a sole trader business.

Now, if you are a sole trader, the upside is that you have a greater degree of privacy. No one, apart from HMRC, is entitled to look at your figures, is entitled to look at your accounts. Those aren't disclosed to members of the public. You may have to use them if you are applying for any funds or loans, but in terms of that level of scrutiny, oversight, it's not required if you're a sole trader.

Limited companies, by the way, have to publish their accounts - they will be in abridged form and they're below a certain size and publish those at Companies House. So, some of that information is in the public domain and in line with sole traders, accounts have to be submitted to HMRC. As a small heads up,

by the way, if your business is relatively small i.e below 85,000 pounds worth of turnover, when it comes to disclosing your expenses, you don't actually have to show a breakdown to HMRC. One single aggregate figure is sufficient. Again, my personal view would be that I would not advise that, and all clients that we deal with, we tend to break down those figures to effectively resolve any questions that HMRC might subsequently have.

But I digress. One other thing to consider for considering a sole trader is relative flexibility. Now, for myself, I've been in business for over 28 years, and when I started my business life, I started as a sole trader. I opened up another business that was connected to it, that was opened up as a company, and I operated the two side by side. A sole trader business suited my purposes both in terms of tax efficiency, both in terms of flexibility,

both in terms of the degree of privacy that was attached to it, which I wanted at that time, and when the time was right, I converted that sole trader business into a limited company. So, please bear in mind, folks, you have the ability to start life as a sole trader. You can migrate to becoming a company

when the time is right and when circumstances are there. Now, taxes are often quoted, by the way, as a reason why people should form companies. Unfortunately, in my time of being a business finance coach and accountant, tax advisor, I see many people who incorporate, become companies when it's not actually necessary,

and it is very prohibitive in tax and it's more costly than if they stayed as a sole trader. They will follow a trend. They'll listen to Dave down the pub, and it will form companies when that isn't actually necessary. In terms of forming a company, the general sweet spot for forming a company is profitability, and when that gets to a certain level, approximately 25,000 pounds a year, that's the time to consider

forming a limited company. If you want a more precise answer, folks, by the way, check out the show notes for a link to a calculated resource we have, which contrasts and compares the sole trader versus limited company. Let's get back on with the podcast. So, certainly in tax terms here, and the reason why they might become a sweet spot figure is because when you are a sole trader, and this is a drawback, the profits that you generate, all of those profits that are considered tax profits by HMRC are subject to tax.

And it doesn't matter whether you spend all those profits, whether those profits stay all in the bank account, you'll still pay tax when profits are generated. And note, the amount of money that you withdraw for yourself to live on, you might call that wages, but in tax terms, they're called drawings, do not count as a business cost. As a footnote,

the reason for that is a sole trader is not in legal terms classified as an employee, and therefore, any monies you withdraw for yourself is not a tax deductible expense. Now, one of the benefits of a sole trader business is the national insurance burden. Generally speaking, sole traders will be subject to two types of national insurance.

And again, check the show notes, by the way, folks, for a previous podcast on national insurance contributions. We have the small amount currently for ‘23/’24 that's set at 3.15 pounds per week, and that's the one that contributes towards state pension and future benefits that are national insurance linked.

You have another one called Class four, but those two together, generally speaking, are less than if you were paid a salary through a corporate route. If you're sitting here listening, folks, by the way, thinking ‘Mahmood, you're talking tax, we'd love to hear more’, check out some previous podcasts, and stay tuned and listen as I talk more about tax in a future podcast episode.

Now, it wouldn't be a balanced podcast unless I mention some of the drawbacks to becoming a sole trader. Firstly, you have that idea of unlimited liability. So, if you make contracts, if there are any exposures to any legal actions as a sole trader, even if it's your business name that interacts, you as an individual are personally liable for any misdeeds, any breach of contracts, any debts that accrue, any liabilities that may arise through any misaction on your part.

That means any personal asset you possess, such as houses or anything else, are potentially exposed. If you're a corporate, if you're a C company, as they would call it in the States, or a limited company, then it's the company that is that legal entity, and as long as that company is the one that's engaging with the clients, with the suppliers, with third parties, it's that entity that is legally liable.

Some people, again, will see sole traders having limited growth ability. A lot of investors will not invest in sole trading businesses. They prefer to invest in companies. There are practical reasons for that, by the way, because of the shareholding and the ability to acquire shares in their entity. A sole trader business,

generally speaking, rightly or wrongly, tends to be less investible in. I'm not sure if that's a term, but it's one that I've just thrown into the mix. Now, in summary, folks, becoming a sole trader in the United Kingdom does offer a wide variety of advantages. There are drawbacks to it, obviously, and that's risk,

that's obviously tax. When your profits do get to a certain level, I would recommend that you consider, if not embrace the idea of corporate structures. One of the things I should mention, by the way, and it would only be fair, is tax. Now, I'm going to talk about this in the following weeks, but tax has more flexibility as a sole trader.

So, if you anticipate your sole trader business making losses as it may do in the earlier periods, then you've got much greater capability of loss reliefs and also generating refunds if you are a sole trader. So, for example, if you've had a job before you started a sole trader business, or you are working part-time and paying tax, but you're also incurring losses in the business set up, the business startup,

and in the early stages, those losses can be used against that other income, what we technically call sideways relief to generate some tax refunds. Losses can be carried back also, and again, subject to what your tax history has been like, that will generate refunds for you as well. You do not get that in a company, so the ability to use those losses,

to use them more flexibly, to use them more powerfully, exists if you're a sole trader business. One thing I would summarise here, folks here, is that you do not choose the company structure first without considering what that future looks like. So, you need to have some idea what your twelve months, two years, three years, might look like. You need to have a plan.

You need some idea what those numbers will look like, and then decide the corporate structure. If you're not quite clear, unless there's any specific reason not to do so, then I would always recommend start off as a sole trader, monitor the situation, and if you need to change to a company, then that is relatively straightforward if you've got access to the right support team.

Folks, I hope you found this useful. I hope you've got some benefit from this podcast. If you do, I'd love to hear your feedback. Give me some comments as well. Share it with those who you feel will benefit from that. If you feel you need some support in this area, then check out the show notes, check out the Contact us page, and we'd love to hear from you.

Until next week, folks. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.