Sometimes 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:
What is a sole trader?
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 self-employment?
Someone that is self-employed works for themselves and runs their own business; they’re their own boss. The tax these people pay is through the self-assessment process and they’ll have no access to sick pay or holiday leave (they will have to financially cover themselves in these areas). People in a self-employed position will have to assume full responsibility for the success of failure of their respective business venture, for the purposes of both employment law and tax.
Sole trader vs self-employed – what’s the big difference?
These two 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.
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.
Alternative business funding in the UK
If you’re looking for a cash boost to take your business idea off the ground and get it up and running, you should consider the alternative finance options that are available to you.
With quick turnaround rates of around 48 hours, it is a preferred funding option to 65% of merchant business owners across the United Kingdom. Partnering with PDQ Funding, one of the UK’s leading Cash Advance company, you are safe in the knowledge we have your best interests at heart.
Many business owners deem traditional bank loans as ‘one-dimensional’ and out of touch with the small business and SME’s. With a conventional bank loan, there are standard requirements such as business plans, forecasts, personal security guarantees and a never-ending amount of application paperwork.
As the high street banks continue to cut back on the availability of business finance, none traditional funding providers have stepped in to offer a wide variety of different products that are aligned with modern businesses. Working capital can be used to invest in new premises, refurbish an existing property, increase stock or assist with cash flow.
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.