Sole Trader

8 Key excerpts on "Sole Trader"

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  eBook - ePub

  Small Business Tax Planning

  All you need to know from start-up to retirement

  • Russell Cockburn(Author)
  • 2011(Publication Date)
  • Harriman House

    (Publisher)

  Many businesses move from one type of business structure to another as they grow. They may take in a partner or outside investor or involve a family member as a tax-effective move.

  The change from being a Sole Trader in self-employment to using a limited company structure is probably the most common seen in the small business world, but it might be better to adopt a small limited company structure from the outset. Getting this choice right requires some careful thought and a good look at the tax implications of the alternatives that are available.

  Sole Trader

  Introduction and definition

  For the individual with a business idea and the skills to put it into operation the most common choice is simply to set up as a self-employed individual; to become a Sole Trader .

  A Sole Trader, or sole proprietorship, is one where the business and the owner are indistinguishable: the owner has unlimited liability for the business because they are the business. The business may be named after the owner or it may run under a specific trade name, thus Russ Cockburn might trade as “Russ Cockburn – Plumber” or he might use the trade name “Incredible Plumbers & Co”. Whatever the name, the identity of the business is that of the proprietor, and the person running the business is that business. Legally the two are one and the same.

  This form of business structure has the benefit of simplicity because it is relatively easy to set up and run. It is also likely to be the most appropriate choice for the smallest of enterprises. Indeed, some people start a business almost without realising it. The transition from enjoying a hobby to running a small business can often be a gradual and almost unnoticed change that occurs whilst the individual is employed by someone else in a permanent role.

  Setting up as a Sole Trader requires minimal form filling and has relatively few compliance obligations in comparison to other business structures. For example, as regards initial interactions with the tax authorities, the simple form CWF1 is used to notify the start of the business for both income tax and NIC.

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  Galbraith's Construction and Land Management Law for Students

  • Carrie de Silva, Jennifer Charlson, Carrie de Silva, Jennifer Charlson, Carrie de Silva, Jennifer Charlson(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  5 Business organizations Carrie de Silva

  Sole Trader

  When persons want to set up in business, there is nothing to prevent them simply trading on their own account, with only their own money at risk. As such, the law would describe such a person as a Sole Trader. Trading in this way, however, may involve a number of drawbacks:

  • There may be lack of adequate funds to develop the business.
  • There is no one to share responsibility for running the business.
  • If the business gets into financial difficulties, the Sole Trader will have unlimited liability for its debts. Creditors will not be restricted to seizing the assets connected with the business. Even the person’s home may have to be sold.

  Partnership

  The Sole Trader may be able to overcome the first two of these disadvantages by forming a partnership. This relationship is described by the Partnership Act 1890 as ‘existing between persons who carry on business in common with a view to profit’. The arrangements for a partnership can be very informal, but it is advisable to have a properly drawn up agreement, in case disputes arise between the parties.

  Partnership is a suitable form of business association for professional people, e.g. accountants, architects, quantity surveyors and consulting engineers, although some such firms incorporate or, since 2000, have traded as limited liability partnerships (see below). Under the 1890 Act, all partners are legally entitled to take part in the running of the business, but in practice the parties can make whatever arrangements they like. All partners are agents of each other for the purposes of partnership business (e.g. making contracts, paying money and engaging staff on behalf of the firm). For this reason, it may be sensible to limit the number of partners. A partnership is often referred to as a firm, e.g. a firm of solicitors, but legally that term has no significance. The law is concerned to know: is this a partnership or a company? The word ‘firm’ might be equally appropriate to a firm of builder’s merchants trading as a limited company, but the legal consequences of dealing with a partnership and a company can be entirely different.

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  Beginning Business Law

  • Chris Monaghan(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Where a person sets up business on their own they can choose to be a Sole Trader. A Sole Trader is a type of unincorporated business and this means that in law there is no distinction between the business owner and the business. Unlike a company, a Sole Trader does not have a separate legal personality and the business’s assets and liabilities belong to her. If Alicia Andrews sets up a business as a Sole Trader and the business incurs liabilities of £500,000 and does not have any assets, then unfortunately, it will be Alicia who must pay the £500,000 from her own personal assets. This will mean that Alicia may have to sell her own assets, such as her house and car, to pay the money. If Alicia does not have the money she could be declared bankrupt. This is a significant consideration for those wishing to establish a business as a Sole Trader.

  Lack of formalities in setting up the business

  There are no formal requirements that have to be met when setting up a business as a Sole Trader. This is unlike an incorporated business. If you have an idea to make money you can decide to become a Sole Trader the moment that you read this sentence and you can cease being a Sole Trader as quickly as that. There are a number of points that you must consider. The first is that if there is more than one person running the business then it will be a partnership (see below). The second is that as a Sole Trader you will be self-employed and will have to pay income tax on any profits and pay national insurance. This will require you to contact Her Majesty’s Revenue and Customs (HMRC) and to notify them of this. You will need to keep accounts and to submit the relevant information to HMRC. The third is that there are restrictions on what you can call your business, as you must not use a name that implies that you are running an incorporated business. You can either use your own name, or have a business name, but in any event you must state on all correspondence and at your premises that you are trading under the business name. So for Alicia this would be ‘Alicia Andrews t/a Learn French Quickly’. The relevant rules for the information that a Sole Trader must disclose to the public and the restrictions on the business’s name are contained in the Companies Act 2006 (CA 2006).

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  Start a Business in Texas

  • (Author)
  • 2015(Publication Date)
  • Entrepreneur Press

    (Publisher)

  A sole proprietorship is the simplest, most common form of business organization. It is defined as a business that is owned by a single individual. It is the easiest and least costly means of getting into business.

  As the owner of a sole proprietorship, you are personally responsible for all business debts and liabilities. All your business profits will be considered as income to you and will be taxed at the personal income level. Refer to the discussion below on tax situations for Texas sole proprietors. Conversely, all personal assets and properties are at risk if a sole proprietorship incurs debts beyond its ability to pay.

  Advantages of a Sole Proprietorship

          •    It is easy and inexpensive to establish.

          •    A sole proprietor has full control over all business decisions.

          •    There are minimal legal restrictions or requirements.

          •    A sole proprietor owns all profits and reaps all benefits of ownership.

          •    There is no requirement to pay unemployment taxes.

          •    There may be no requirement for the owners to purchase workers’ compensation insurance for themselves.

  Disadvantages of a Sole Proprietorship

          •    A sole proprietor is personally liable for all business debts.

          •    A sole proprietor may have difficulty obtaining long-term financing.

          •    The success of the business depends wholly on the efforts of the sole proprietor.

          •    Illness, injury, or death of the sole proprietor will directly threaten his or her business.

          •    There are no unemployment benefits if the business fails.

  If you will operate your sole proprietorship under a name other than your own, you must register the business name or trade name (commonly known as “doing business as” or “dba”) with the local county clerk’s office. For more information, refer to the discussion on naming your business in Chapter 2 .

  As a sole proprietor in Texas, you are not required to file state income tax forms, since the state has no personal income tax, and you do not pay corporate franchise taxes. General Partnership

  A general partnership is the association of two or more persons who have agreed to operate a business. You can form a general partnership by a simple verbal agreement of the partners. However, it is in your best interest and the best interest of all parties that you have an attorney prepare, or at least review, a formal, written partnership agreement that addresses such issues as:

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  The Law (in Plain English) for Photographers

  • Leonard D. DuBoff, Sarah J. Tugman(Authors)
  • 2020(Publication Date)
  • Allworth

    (Publisher)

  limited liability company , and a few hybrids. Once the business form has been selected, there are organizational details, such as partnership agreements, operating agreements, or corporate papers to complete. These documents define the day-to-day operations of a business and, therefore, must be tailored to individual situations.

  An explanation of some of the features of these various business organizations, including their advantages and disadvantages, follows. This book cannot, and does not, include complete coverage of all of the pertinent details about business structures and their pros and cons. Each person’s personal circumstances are different and require consideration of individually relevant factors. As previously suggested, you should consult an attorney and an accountant before deciding to adopt any particular structure. This discussion is meant to facilitate your communication with your lawyer and to enable you to generally understand the choices available.

  THE AMERICAN DREAM: SOLE PROPRIETORSHIP

  The technical name sole proprietorship may be unfamiliar to you, but you may be operating under this business form right now. A sole proprietorship is an unincorporated business owned by one person. Although not peculiar to the United States, it was, and still is, the backbone of the American dream. Legal requirements are few and simple. In many localities, professionals such as photographers are not required to have occupational licenses, while a business license is often required. If you wish to operate the business under a name other than your own, the name must be registered with the state or, in some cases, the county in which you are doing business.

  There are many financial risks involved in operating your business as a sole proprietor. If you recognize any of these dangers as a real threat, you probably should consider an alternative form of organization. If you are the sole proprietor of a business, the property you personally own is at stake. In other words, if for any reason you owe more than the dollar value of your business, your creditors can force a sale of much of your other personal property to satisfy the debt. Thus, if one of your photographs is defamatory, an invasion of someone’s privacy, or infringes someone else’s copyright, you could find that you are personally responsible for paying any judgment entered against you.

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  Money-Smart Solopreneur

  A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers

  • Laura D. Adams(Author)
  • 2020(Publication Date)
  • Entrepreneur Press

    (Publisher)

  A sole proprietorship is the simplest business entity. It’s made up of one person or is co-owned by a married couple. You don’t have to comply with any specialized government requirements or submit any paperwork to be a sole proprietor. That allows you to focus entirely on launching your venture and creating revenue.

  When you start a trade or business without registering it with your state, you are automatically a sole proprietorship under the law. If you earn income on the side as a freelancer or contractor, you may have a sole proprietorship and not even realize it. The simplicity of a sole proprietorship can make it a good starting point for solopreneurs, especially if your industry or trade has few legal risks.

  Here are the main pros of being a sole proprietor: $  It’s convenient to start because you don’t have to take any formal action. $  It has no cost because you aren’t required to register with your state. $  It gives you privacy because your business doesn’t get entered in public records. $  It’s simple to maintain because there’s no annual paperwork (such as meeting minutes) to complete. $  It’s easy to convert into another type of business entity in the future, if you wish. $  It simplifies taxes because you include the business profit or loss on your personal tax return.

  We’ll cover taxes in Chapter 12 , but all income earned by a sole proprietorship goes directly to the owner. You pay federal and applicable state income taxes, plus the self-employment tax, on your business’s net profit (gross income minus expenses).

  But having a business entity that’s so easy to set up comes with some downsides as well. While the lack of separation between you and your business makes it easy to launch and file taxes, it also exposes your personal finances to an unlimited amount of risk.

  As a sole proprietor, you receive all the profits from your business, but you’re also responsible for its debts. That means that in addition to your business assets, your personal assets—such as your savings, vehicles, and home—could be at risk if a customer, client, or other party sues your business.

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  A Study Guide for the Operator Certificate of Professional Competence (CPC) in Road Freight 2018

  A Complete Self-Study Course for OCR and CILT Examinations

  • Clive Pidgeon(Author)
  • 2018(Publication Date)
  • Kogan Page

    (Publisher)

  Becoming a Sole Trader is relatively easy; all you need are the funds to start and you can trade freely. In the case of transport, all you need is an operator’s licence (‘O’ licence) with sufficient funds to meet the requirements of the licence and the funds for the deposit or purchase of items such as the vehicle, fuel and insurance. In real terms that makes transport quite an easy area in which to operate a business, which is why it is an industry where many ‘owner-drivers’ can be found. Whilst it is an uncomplicated way to start a business, it is also easy to cease trading; all you need to do is stop. There are no formalities.

  Many Sole Traders find success because they deal directly (face to face) with their customers and are able to develop strong business links and trust with them. In addition, the more work a Sole Trader performs, the greater are the re-wards. They are not bound by salary caps or grading and, if successful, are often able to expand their business through recommendation and word of mouth, and may actually employ staff of their own if the business grows sufficiently.

  The benefits, however, are accompanied by some disbenefits, not least that if a Sole Trader does not perform well or lets down a customer, this can be communicated by customers and the Sole Trader may well have to cease trading as the work ‘dries up’. In addition, because of the ease of access into becoming a Sole Trader, it is a very competitive area of business. This is largely due to the fact that many Sole Traders are small businesses. In turn, this can make attracting support and funding from banks and financial institutions difficult, particularly given the need for financial reserves in relation to ‘O’ licensing and/or if trying to expand a fleet of vehicles.

  The main disbenefit, however, must be that the Sole Trader cannot limit their liability and, if they go bankrupt (Sole Traders go bankrupt, limited companies go into liquidation) they can lose everything ‘up to the limit of their personal wealth’.

  Other disbenefits include the fact that Sole Traders need to work to earn. ‘No work = no money’ and so sickness and holidays can prove costly and long-term illness may force closure. In cases where the Sole Trader may need to hire someone to cover for them, or employ someone to serve existing customers, there can also be problems because some customers expect the Sole Trader themselves to be the one to serve them (perhaps as they have for several years) and may resent the ‘new face’ or feel that they have been relegated to a poorer standard of service. In addition, as a Sole Trader you normally pay income tax and National Insurance Contributions (usually Class 2 and also possibly Class 4, depending on profit made) which are more than the Corporation Tax a Limited Company would pay.

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  Setting Up and Maintaining an Effective Private Practice

  A Practical Workbook for Mental Health Practitioners

  • Philippa Weitz(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Chapter Two Setting up the structure of the business "No clients, no business, no money"

  2.1 What type of business? The options available to you

  Essentially there are four types of businesses:

  • Sole Trader
  • Limited company
  • Partnership
  • Cooperative

  The choice you will make will depend on your personal circumstances and your ambitions. The two options I favour most for the counselling/psychotherapy practitioner are Sole Trader or limited company. I will therefore discuss them in more detail. Before you decide I would recommend that you discuss your choices with an accountant or business start-up adviser.

  A very important piece of advice is to understand that you are not your business . Your business needs to be a separate entity to you; think of it as another person if you like. This is very important. It will mean that at some stage you may make decisions that are in the best interest of your business, as opposed to being in your best interest. It is important to understand this and not to confuse the two. It is easier to understand with a limited company as it is a separate legal entity and you will be an employee of the company, which will have its own life blood. You may have an aim to grow the business sufficiently to sell it later on, one very good reason for keeping you and the business separate.

  2.1.1 Sole Trader

  This is how most people begin. This means that you are selfemployed. You can be both self-employed and work for someone else at the same time. For example this would be the case if you saw clients in the evening at home but might be working for an employer during the day as is the case with our second example, Simon.

  It is very easy to set yourself up as self-employed—all you need to do is to tell your tax inspector or your local Contribution Agency within three months of starting. As they operate a joint registration scheme you only need to tell one office, they will automatically pass the information on to the other office. They will also notify the Customs and Excise office. (I will discuss VAT in a separate section.)

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