Being self-employed or a sole trader is the simplest, quickest and most accessible way to set up your own business. However, many would-be small business owners are unsure quite what this entails, what the requirements are, and how these terms are defined. In particular, a lot of people don’t know whether being a sole trader and being self-employed are the same thing, or whether there are any differences between them.
To work out whether there is any difference between these two terms, either theoretically or practically, it is first necessary to look what they actually mean. How is a sole trader defined, and what is the definition of being self-employed?
Being self-employed means that you work for yourself. You are not unemployed but neither do you have an employer – or, to put it another way, you are simply your own employer. Company directors are not classed as self-employed; usually they are considered employees and paid as such.
Being a sole trader means that you have a business of which you are the sole owner. Again, company directors are not generally included. Being a sole trader does not necessarily mean that you have to work completely alone. You can take on employees and still be a sole trader. It just means that you are the only person with any ownership of your business.
So there are some differences between being a sole trader and being self-employed, though most of these will have little or no practical bearing on the way you conduct your business. All sole traders are self-employed, but not all self-employed individuals are sole traders. For instance, you could be self-employed as part of a partnership, and not be a sole trader because you will share ownership of the business with your partner or partners.
It is easy to become self-employed (and if you are the only owner of your business this automatically means becoming a sole trader). All you have to do is register with HMRC within three months of starting up – we can help with this (contact us). When you are registered you will begin paying Class 2 National Insurance Contributions (though these are stated to be scrapped in the future) and you will need to file an annual self-assessment tax return for your new business.
Becoming self-employed takes just a few minutes and involves no registration fees. It also means that your day-to-day bookkeeping is fairly straightforward and you can keep all of the profits you make. However, unlike setting up a limited company there is little to no legal distinction between your finances and those of your business. You are therefore personally liable for any debts your business might have.
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