Difference between sole trader and self employed

difference between self-employed and sole traderSometimes the differences between sole traders and self-employed individuals can seem to be a rather blurred line. So, we want to explain the key differences to you what impact it may have on you, as a business owner.

For many workers, the differences between self-employed people and sole traders may seem to be quite unimportant. In both practical and legal terms, these are more or less the same thing after all. Although, there are indeed a few key differences you should know about before deciding on your own path.

Sole traders often run a business that buys and sells goods, whereas someone who is self-employed is usually working on a freelance basis, more or less selling their time or providing a service.

Knowing even the smallest of details about the way a business is set up or how it is structured can make the world of difference when deciding on what type of venture you want to make a career out of.

Let’s talk through them both individually in order to analyse this further:

Self-employed vs sole trader

Self employed and a sole trader are basically the same thing, though there are in fact tiny differences to remain aware of. As a sole trader it is your responsibility and your responsibility alone to make your business successful. As someone who is self-employed it doesn’t necessarily have to be that way.

As you can likely see, there is indeed much crossover between the two different self-employment types, but those little changes across these two business structures can make all the difference. If you’re still considering what path to take your venture down and weighing up your options seems to be becoming rather tedious, read on and we’ll give you some extra details to help develop your understanding further.

There are also occasionally differences in the types of business bank accounts used by both self-employed people and sole traders, so doing some research in that area in your free time may go a long way in helping your understanding also.

Sole Trader Definition

The definition of a sole trader is a person who is the exclusive owner of a business, you work for yourself, and not for an employer. As a sole trader you can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes.

Sole trading is a way of running a business. Someone who is self-employed and also the exclusive owner of their business is known as a sole trader. This type of business will have no directors and therefore do not need to register with Companies House. A sole trader is self-employed and as such should pay tax through the self-assessment process.

A key bit of information here is that a sole trader and his/her business are one in the same; both together equal one legal entity.

All profits after tax that a sole trader manages to make are retained by the owner, making bookkeeping and day-to-day business running tasks like that pretty straight forward. However, the business owner here will also be liable for any debt the business builds up, as well as any losses that are recorded by the company. This leads many people to believing that registering as a limited company can often be a safer option, especially for small businesses.

The type of business structure that has its own legal identity is known as a limited company. This legal identity is separate from its shareholders and its directors. It’ll even remain to be the case if it’s run by just one person, whom acts as both director and shareholder of the business venture.

What is the meaning of self-employed?

Being self-employed means that you are your own boss. You are in charge of your own work schedule, and you are responsible for finding your own clients or customers.

This can be a great way to earn a living if you are motivated and organized. However, it can also be stressful and unpredictable. There is no guaranteed income, and you may have to deal with occasional dry spells.

Nevertheless, many people find that being self-employed is greatly fulfilling, and it allows them to pursue their passion without having to answer to anyone else. If you are considering becoming self-employed, it is important to do your research and make sure that you are prepared for the challenges that come with this type of work.

But if you are willing to put in the hard work, being self-employed can be an immensely rewarding experience.

What responsibilities do you have if you’re self-employed?

Once you decide on being self employed you should inform HMRC you’re self-employed as soon as possible. You’ll then be responsible for:

  • You will need to complete a Self Assessment tax return by 31 January each year
  • You will have to pay National Insurance contributions and income tax on the profit you make
  • You will have to register for VAT if your VAT taxable turnover exceeds £85,000

It is a legal requirement that you also keep business-related receipts throughout the year so that you can deduct any allowable expenses from your profits when you complete your tax return. These need to be kept for a six year period.

How to register as a sole trader

If you’re certain that setting up as a sole trader is the right move for you, the process is actually pretty straightforward. You need to register with HMRC and let them know that you are self-employed and that you intend to register for self-assessment to pay tax.

You may then proceed with your business venture. You might also wish to register for VAT to lend credence to your company reputation, and it can be worthwhile to set up a specific sole trader bank account. Though, these decisions will ultimately be yours to make, after all you’re an independent business owner now.

Is there a difference between being self-employed and being a sole trader?

The differences between self employment and sole trader businesses are indeed few and far between, though when deciding on the structure of your business venture, knowing those finer details can make the world of difference to you.

Research further into either business setup if you wish to know more and continue to explore new opportunities within your career path. The more you discover and uncover, the more chance you’ll have of getting to where it is you want to be

Frequently asked question (FAQ)

What's the difference between self employed and sole trader

A sole trader is basically the same as someone who is self-employed, There really is no difference.