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When initially setting up a company in the UK, one of the first things you need to decide on is its structure. Due to the nature of start-up businesses, the initial structure of many companies in the UK is that of a sole trader, as it is by far the quickest, easiest and most accessible way to set up a new business. But as your company grows in both size and success, you might start to wonder whether the sole trader structure is still suitable for you, and whether you need to ask yourself the question, "Do I need to register my business?". In this article, we will explore what registering your business will mean for you as a sole trader, what the benefits of registering a business are, and why you might want to consider doing just that.
What is a Sole Trader?
A sole trader, also known as a sole proprietorship, is one of the many company structure types you can choose for your business. As indicated by the name, and in contrast to other company structures, a sole trader defines a business as being run by one individual. This means that there is no legal distinction made between the owner of the business and the business as an entity itself. As a sole trader, you are effectively self-employed and have total control and responsibility over every aspect of your business. Starting a business as a sole trader is very popular due to how easy it is to do so. You simply need to register your company's name and secure local licenses, and your business is ready to go.
Read our blog on how to set yourself up as a sole trader
Working as a Sole Trader
As a sole trader, you are the business. This extends to all responsibilities and administrative processes; as an individual, you are solely responsible for several aspects of your company, such as:
- Profits after taxation
As a sole trader, you are individually responsible for running your company; however, this only applies to the administrative and fiscal matters of running a business. Being a sole trader, you can still employ individuals to work for you; you alone are responsible for the business, but that doesn't mean you have to work alone.
Sole Trader Benefits & Drawbacks
Now that we have a clear idea of what a sole trader is and what it is like to work as a sole trader, we can more closely analyse the benefits and drawbacks of this company structure.
The benefits of being a sole trader include:
- Setting up your Business: Under a sole proprietorship structure, you have to do very little to start your business, especially compared to other business structures.
- Companies House: As a sole proprietorship, there is no requirement to register your business with Companies House when earning less than £1,000. In this instance, that will only be to let them know that you will be submitting self-assessment tax returns.
- Flexibility & Control: As you are the sole individual in charge of your business, you have total control over your business and how it operates. You also have the ability to flexibly alter its direction without needing to consult other directors and shareholders, which can make for a more streamlined and "easy" experience.
- Profitability: Simply put, since you are the business, you gain all of the profits from the company's operations and are not required to share them with other persons of significance.
- Tax Allowances: Expenses to operate your business, such as IT equipment and machinery, vehicles or furniture, may be claimable as capital allowances. This tax relief may also include other expenses made in the course of your company's operations.
Some disadvantages of being a sole trader include:
- Personal Liability: While being the sole person with responsibility over the business presents benefits like more control and more profits, this also presents a whole host of challenges. As the sole proprietor, you are personally responsible for everything- including businesses debts. If the worst happens and your company fails with debts outstanding, the repercussions for you personally can be severe, as these debts will need to be paid using your personal assets. This can result in the loss of property or even bankruptcy.
- Financial Opportunity: In short, when compared to limited companies, it can be much more challenging to raise capital for sole trader businesses. This is because sole trader businesses are seen as a greater risk by banks. For this reason, many investment opportunities, if they are even available at all, will be much less favourable to sole proprietorships than they are to limited companies.
- The Singular Approach: Whilst having complete control over a business can feel more freeing and flexible, as your company grows, this can become something of a lonely existence. When it comes to making important business decisions, both creatively and administratively, it can be helpful to share the responsibility with other individuals.
- Public Perception: Sole trader businesses are often considered to be inferior compared to limited companies. The general view for many is that sole trader businesses are younger, less-established and maybe even less professional than limited companies.
Do I need to Register my Business?
The question of do I need to register my business does somewhat depend on your own wants and desires for your company. The advantages and disadvantages of a sole trader highlight the theme of operating alone being high-reward; in terms of profitability and flexibility. It is also very high-risk in terms of being held personally accountable for the failures of the business. You also run into the significant obstacle of generating the necessary capital and investment to grow your company. A limited company does come with its own unique set of drawbacks. For example, having to be affiliated and registered with Companies House for a fee, as well as all of your personal and corporate information being disclosed on public record.
However, there are several benefits to registering your business that address some of the main concerns of being a sole trader.
The benefits of registering a business include:
- No Personal Liability: The most significant benefit of registering a limited company is eliminating personal liability. Unlike as a sole trader, should your business run into trouble, all of your personal assets will be secure. This is because a limited company is treated as a separate legal entity, rather than being registered in your name.
- Professional Perception: As previously alluded to, sole trader businesses may erroneously be considered as "lesser" when compared to a limited company. This will improve dramatically when registering as a limited company, and you may see improvements such as:
- Being able to attract new clients and investors
- Access to a much more comprehensive range of investment opportunities
- Access to more locations and markets
- Tax Planning: When it comes to tax planning, limited companies in the UK only have to pay 19% Corporation Tax on their profits**. This compares very favourably to the amount that sole traders have to pay, which can range from 20% to as high as 45% income tax on their profits. This provides several benefits in terms of tax planning, providing you with opportunities to reinvest surplus cash into the company. You can also postpone the withdrawal of company profits to a later tax year; when a lower rate of personal tax would be due.
**In the year 2023, the rate of Corporation Tax paid is set to change. Learn more about the upcoming changes to Corporation tax.
How UK Postbox can Help
Whether you choose to remain as a sole trader or make the step to become a limited company, our business address services can provide you with several benefits. Our business addresses can be used for a variety of different purposes:
- A Correspondence Address: A correspondence address is an address that you can be officially contacted at but do not reside in. This is also something that our virtual addresses can be used for. For more information on correspondence addresses, we have a blog on the differences between correspondence addresses & residential addresses.
- A Business Trading Address: A trading address is where your business is conducted from. For smaller companies, this can often be a home address. Our Business Addresses can be used as a trading address so you can protect your privacy at your home or your place of work.
- A Registered Office Address: If you want to set up a private limited company in England and Wales, you'll need a registered office address for your business- our addresses can be used for this purpose.
- A Directors' Service Address: Our Business Address Service also gives you an address that you can use as the official correspondence address for your directors and major shareholders.
For sole traders, even in the instances where your business addresses are not on public record, our business addresses are advantageous in that they:
- Our business addresses come with access to our online mail management platform. This platform can help sole traders to manage all of their business mail online and keep it separate from 'every day' post.
- Can provide a more professional-looking address to be used on their billing and equipment, such as business cards and stationery.
- With one of our business addresses, you can also avoid needing to use your personal, residential address on billing and business equipment.
While there are many different benefits to the two company structures, for many, registering your business as a limited company is seen as the natural progression to make as your company grows. If you decide that this is the route that you would like to take, UK Postbox can help you in this regard. For one, we have a complete blog you can read here, which is dedicated to setting up a limited company.
When registering your business as a limited company, however, we also provide a service that can be integral to this process: the ability to register a business with a UK Postbox address. With this service, you can use one of our virtual business addresses as a correspondence address, which you must provide when registering a limited company. For more details on this idea, you can read our blog on How to Register a Business with a UK Postbox Address.
Deciding whether or not you should remain as a sole trader, or make the step to becoming a limited company, can be a very tricky decision to make. Both company structures have their advantages and disadvantages, with sole proprietorship offering you freedom and flexibility to run your business how you see fit, and a limited company offering the structure needed to expand your company whilst removing the personal liability you have for your own company. If you do decide to register your business as a limited company, UK Postbox is on hand to help provide you with a correspondence address that can be used in this process.