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.
Sole Trader vs Self-Employed
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.