Sole traders are the most common form of unincorporated businesses in Wales. They are relatively quick and cheap to set-up and require reduced administration compared to that associated with a limited company.
By definition, sole trader businesses have a single owner or proprietor but like any other trading entity can employ other staff and managers. Essentially, a sole trader business can in theory be of substantial size, even though in reality this is rarely the case.
Setting up a Sole Trader Business
Administratively, setting up a sole trader business is accomplished by informing HM Revenue and Customs that trading has commenced. Because sole traders are inextricably linked to their owners, HM Revenue and Customs will asses profits earned by the business according to the fiscal year dates. These run from 6 April to 5 April each year.
A sole trader business can chose (for personal accounting purposes) to define its financial year as any other date, for example 31 December or 30 September. In such cases where this chosen year end date differs from the 5 April, the income generated is simply allocated from the two financial periods which straddle 6 April to 5 April tax year.
No Legal Separation
As intimated above, there is no legal separation between the sole trader business and its owner. The assets and liabilities of the business are deemed to belong to the proprietor and in effect, the personal property of the owner becomes available to creditors should the business not be able to satisfy its debts.
This is perhaps the most worrying aspect of a sole trader business; the prospect that if the operations fail and the business still owes money, the personal belongings of the owner can be used to meet the shortfall.
Limited liability inherent in the majority of UK companies prevents this from occurring without the express consent to the owner, through signing a waiver agreement for example.
Businesses whose operating activities might cause damage to property or persons should an accident occur might bypass the sole trade option and elect to set-up a limited company. Professional indemnity insurance might be a means of obtaining peace of mind although this can be expensive and not completely comprehensive.
Sole Trader Businesses and Tax
Sole trader businesses are taxed based on the single measure of profitability. The owner is deemed to have income equal to the profit of the business, irrespective of whether that profit has been drawn in to a personal bank account.
This can be a serious disadvantage where money is not drawn or perhaps where the business has accrued a high level of stock or debtors. The owner will be taxed on the basis that these assets have been converted in to money which is immediately available to him or her.