What is a sole trader: the essential guide to going it alone

Starting a business means making a lot of fundamental choices from the get-go. Whether you’re exploring how to start a side hustle or ditching the nine-to-five, one of your first big decisions will be to pick the right structure for your new venture.

When planning how to run a business, many entrepreneurs opt to register as a sole trader. To some, it’s a step towards setting up a limited company. Others embrace this structure permanently, making the most of its simplicity and the fact that it places you in full control of everything from pricing strategies to how to advertise your business. 

But just what is a sole trader business? What are its pros and cons, and how do you go about becoming a sole trader? We talk through it all in this guide, looking at everything from registration processes and managing taxes to marketing strategies and keeping track of your finances. 

We’ll unpack exactly what it means to be a sole trader to help you decide if it’s the right route for your business.

What is a sole trader business?

Being a sole trader means running a business entirely by yourself. Unlike a partnership, there’s nobody else shouldering the ultimate responsibility for your success. And unlike with limited companies, there's no legal separation between you and your business. In other words, you quite literally are your business.

This means that your business's profits and liabilities directly affect your personal financial health.

While the sole trader model can be used to bring all kinds of small business ideas to life, this business structure is most associated with people providing some kind of service – for example, freelance writers, taxi drivers, personal trainers, beauticians, plumbers, and decorators.

That said, business people involved in retail, for example those selling handcrafted items online, may also choose sole proprietorship due to its flexibility and ease of setup.

It’s the simplest route to self-employment because, beyond paperwork relating to tax, there are few legal requirements for starting a small business as a sole trader. Additionally, the minimal initial expenses make it an ideal pick for those interested in low cost business ideas.

Remember, the simplicity of how to become a sole trader doesn’t remove the need for a clear understanding of what running this type of business involves.

Is it necessary to register as a sole trader?

Setting yourself up as a sole trader entails registering with HMRC for tax purposes. HMRC rules dictate that you must register for Self Assessment if you earn more than £1,000 from your business in a tax year (6 April – 5 April). The deadline for registration is 5th October in your business’s second tax year.

Here’s an example. After considering side hustle ideas, Chloe starts her mobile beauty business in June 2024. By 5th April 2025, she brings in £3,500. Since her earnings top the £1,000 threshold, Chloe will need to register with HMRC by 5 October 2025.

Sole trader pros and cons

Having laid out what this structure is, let’s now run through some of the main advantages and snags of being a sole trader.

Advantages of sole trader businesses

Total control

Running your own show as a sole trader is pretty straightforward. You’re the boss, calling all the shots and completely free to steer things as you wish. This control makes setting up and running your business less complicated and more direct.

As a sole trader, you can make decisions on the fly without needing approval from partners or board members. This hands-on approach is perfect if you want direct involvement in every aspect of your business.

Direct access to profits

The financial benefits of being a sole trader are clear: all the profits you make, after taxes, automatically belong to you. This is a major perk, providing a strong incentive to succeed and grow your business.

Being a sole trader means the profits from your hard work are immediately in your pocket, without the need to think about dividends and declaring drawings.

The relative simplicity of your small business finances, together with the obvious and tangible link between effort and reward, can make this a very satisfying way to be your own boss.  

Flexibility

Operating as a sole trader offers unmatched flexibility. As you’re completely independent, you can work hours that suit your lifestyle and adapt quickly to changes in the market or your personal life.

Sole proprietorship isn’t just a neat solution to the question of how to make extra money; it can also bring a deeper sense of personal fulfilment. You have the freedom to work how you want, and on projects that align with your passions and values.

Personal touch

The ability to add your unique stamp to every part of your business is something special about being a sole trader. Customers often enjoy getting to know the person behind the service, leading to deeper loyalty and a standout brand.

A personal touch could be something as simple as sending custom “thank you” notes when dispatching orders. This level of attention can not only help you to stand out in a digital world, but could even translate into word-of-mouth referrals and customer acquisition. 

Lower start-up costs

Kicking off as a sole trader often means fewer upfront expenses compared to other business models. The initial financial outlay is typically lower, with minimal fees and fewer bureaucratic hurdles.

This accessibility makes becoming a sole trader an attractive option for those entrepreneurs launching low cost business ideas. Thanks to the lower barriers to entry, it’s easier to get your dream off the ground, even on a tighter budget.

Disadvantages of sole trader businesses

Unlimited liability

The major downside of operating a business as a sole trader is the unlimited liability that comes with the territory. As there is no legal distinction between you and your business, any losses or debts incurred through your enterprise are your personal responsibility.

To mitigate this risk, consider obtaining insurance, such as professional indemnity or public liability insurance, to cover you in case of damages related to your work. Or, you may choose to transition to limited company status to separate personal and business liabilities.

Work-life balance and support

Maintaining a balance between work and personal life can be challenging. Without a clear boundary, work can eat into what should be your spare hours, leading to stress. Lacking a support network can make decision-making and problem solving tougher.

Joining local entrepreneur groups or online communities can provide support and advice, helping you feel less alone. Plus, you can use digital tools and apps to streamline your business and allow more time for rest and personal activities.

Credibility with clients

Being a sole trader might undercut your credibility in certain fields, especially if you’re providing services to other businesses. For example, a sole trader running a digital marketing agency to offer content creation and social media management services may struggle to secure corporate clients who typically prefer dealing with limited companies.

This is far less of an issue in customer-facing fields like domestic cleaning or selling stuff online, where the quality of your work will tend to trump any concerns about your business structure. 

Is a sole trader business right for you?

Before setting up as a sole trader, it’s worth weighing up alternative options for the structure of your business.

For example, you might consider a partnership. This is similar to the sole trader structure, in that you and your business are legally the same. The key difference is you’ll be running things alongside at least one other person, sharing control, profits, and also any losses. This can dilute individual risk, but you have to agree on decisions.

Then there’s setting up a limited company. This means your business will exist as its own entity, legally speaking. Your personal finances will be safe if the business encounters difficulties, but there’s a lot more regulatory compliance involved, and public disclosure of financial records means that everyone can see your company’s money details.

How to register as a sole trader

If you’re wondering how to set up as a sole trader, the good news is that it’s very straightforward.

Whether you’re running with one of your online business ideas or opening a brick-and-mortar store, becoming a sole trader simply involves registering for Self Assessment with HMRC. This process makes you officially self-employed as a sole trader in the eyes of the government.

To start, visit the HMRC website and follow the instructions to register for Self Assessment. 

You’ll need to provide some basic information about yourself and your business. You can trade under your own name, but there’s also lots of flexibility when it comes to going with alternative business name ideas – just don’t include offensive words or official terms like “limited” or “plc”.

Once registered, you’ll receive a Unique Taxpayer Reference (UTR), which you’ll use when you file your Self Assessment tax return. Remember, you must register by 5th October in your business’s second tax year to avoid any penalties. Additionally, keep track of all business-related income and expenses from day one, as you’ll need this information for your tax return.

Insurance and tax responsibilities

Navigating insurance and tax responsibilities is essential for sole traders. If you’re curious about questions like what tax does a sole trader pay, or you’re wondering if you need sole trader insurance, you’re not alone. Here’s what’s useful to know:

Do sole traders pay corporation tax?

Unlike limited companies, sole traders don’t pay corporation tax. Business profits are taxed as personal income, meaning you’ll file them under Self Assessment each year. You must file your return by 31st January in the year following the tax year in question. For example, the deadline for filing for the tax year 2025-2026 will be 31st January 2027.

Do sole traders pay National Insurance?

Yes, sole traders with annual profits of £12,570 or more usually pay Class 2 and Class 4 National Insurance contributions. As with income tax, this is paid through Self Assessment.

Can a sole trader be VAT registered?

Absolutely. If your business’s annual turnover is over £85,000, VAT registration is required. But you can register voluntarily if you’re under this threshold, which might benefit you financially.

Does IR35 apply to sole traders?

IR35 legislation targets disguised employment, where workers supply their services to clients via an intermediary entity like a limited company, but are essentially employees. As a sole trader, you aren’t directly hit by IR35, as your business isn’t considered a separate entity. However, showcasing your independence remains key.

Private sector businesses over a certain size must evaluate if those working for them fall inside or outside of IR35. While this primarily affects those in limited companies, the companies you work for could change how they interact with you based on these rules.

Take the hypothetical example of Tom, a personal trainer and sole trader. He works exclusively with one gym, following their schedule and using their equipment for his sessions, which closely mirrors an employment situation. Although Tom isn’t affected by IR35 directly, his working arrangements might make the gym reassess their contract to ensure they comply with IR35.

Do I need public liability insurance as a sole trader?

While not legally required, public liability insurance is recommended for sole traders. It offers protection from third-party claims, which is crucial if your business involves public interaction.

For example, let’s say you’re a sole trader operating as a domestic cleaner, and accidentally damage a client’s property while working. Public liability insurance would cover the cost of damages and legal fees minus any excess.

Managing your sole trader finances

Navigating sole trader finances is never going to be exciting, but with the right approach, it should all become second nature. 

From setting up the right business bank account to keeping records, a bit of planning and organisation can go a long way. Let’s walk through some key steps to manage your sole trader business.

Opening a business account

We’ll start by answering a common question: do I need a business account as a sole trader? Keeping your personal and business finances separate is not a legal requirement but is highly recommended for sole traders. Look for accounts with low fees and good benefits, and which you can easily access on the go.

Record keeping and accounting

Bookkeeping for small businesses is reasonably simple, though you do need to track and keep receipts for every transaction – from morning coffee with a client to your stationery order. You can tot things up manually or use accounting software. Either way, having a clear idea of your cash flow means simpler tax returns and less stress throughout the year.

Budgeting and financial planning

Creating a budget isn’t just a one-time task; it’s an ongoing process that will guide your business decisions. By forecasting your income and expenses, you can avoid financial pitfalls. Remember, a good budget adapts to your business’s changing needs, so revisit and adjust it regularly to stay on track.

Seeking professional advice

Sometimes, it’s okay to admit you don’t have all the answers. Seeking advice from a financial advisor or an accountant can be a game-changer for your sole trader business. They can offer tailored advice, help with tax planning, and even identify savings or business growth strategies you hadn’t considered.

Growing your small trader business

After you’re all set up as a sole trader, you can focus on taking the next steps towards long-term success. Let’s check out some top factors for boosting your business’s potential.

Networking and collaboration

You might technically be all on your own as a sole trader, but there’s a whole community of like-minded people to connect with out there.

By joining local Chambers of Commerce meetups or attending small business networking events, you can forge friendships with peers, swap stories, and build credibility in your business community. Plus, there’s always LinkedIn and business forums for those days when leaving the house isn’t on the cards.

Relationships in business are like gold. Good ones can lead to referrals, partnerships, and even finding mentors to guide you through the ups and downs of entrepreneurship. Remember, it’s not just what you know, but who you know and how you work together that counts.

Online presence and marketing

These days, an effective online presence is no longer optional for small businesses, but essential. Start by crafting a user-friendly website that reflects your brand. If you’re selling items, having a sleek and well-designed online store to showcase your range is a must.

Remember, you can also engage your audience through regular blog posts or updates, focusing on providing value and building trust. Consistency is key, so consider creating a posting schedule to stay on track.

If you’re interested in how to make money online, learning how to use social media for small business is worthwhile. Platforms like Instagram and Facebook can offer a dynamic way to promote your brand, demonstrate your expertise, and directly engage with potential customers.

Customer service

Offering great customer service is key for any small business. It goes beyond problem-solving to ensure customers feel both valued and understood. Effective use of email marketing for small business can be a powerful tool in this regard, allowing you to provide updates or special offers to existing customers, and respond promptly to queries and feedback.

Let’s take the hypothetical example of a street food vendor named Jack whose food and drink business switches up its location frequently. Anyone signed up to Jack’s online mailing list will get weekly updates about his location schedule, and delicious new treats on his menu. In doing so, he keeps customers informed and encourages repeat business by alerting them to when his truck will be nearby.

High customer retention rates are often a byproduct of providing an attentive service. Keep clients coming back for more by understanding how to price a product or how to price a service fairly, and adding a personal touch when possible. Consider loyalty programs or exclusive discounts. Even a small touch like taking cashless payments through a card machine can make a real difference.

Understanding how to do market research for small business can also help you to grasp what your customers want. This can inspire new business ideas that cater directly to your market. Remember, happy customers are more likely to recommend your business.

Diversified offerings

Diversification can be a turning point for sole trader businesses hoping to expand. Start by looking at what you currently offer and what your customers might need. Conduct a SWOT analysis for small business success, in order to pinpoint fresh opportunities and think about setting competitive prices while keeping an eye on your profits.

Don’t be afraid to explore ideas for second income streams or to transform hobbies that make money into legitimate businesses. New offerings can help attract new customers and reduce the risk of overreliance on a single product or service.

Remember, your diversification should fit what your brand’s all about. It’s not about piling on more stuff, but about adding real value that gels with what you stand for. This smart move keeps your sole trader business solid while you check out potential new routes to profit.

Strategic planning and growth

Strategic planning is your ticket to business growth. Kick off by learning how to write a business plan, clearly defining your goals, who you’re selling to, and how you’ll get the word out. Make sure you’re clear on the nitty-gritty legal stuff and perform regular financial analysis to ensure your sole trader business runs smoothly.

Having a marketing strategy for small business can also help your business grow. Market research, even if it’s simply looking up relevant social media hashtags and reading reviews on Google and Trustpilot, lets you peek into your customers’ heads, see what the competition’s doing and spot new growth spots or things to tweak.

Growth strategies should evolve with your business. Keep an eye on how things are going and shake things up based on results. Remember, starting small or keeping your focus on how to make money from home can cut costs in your startup period. Keep your plans flexible, review them often, and don’t be shy to try out new ideas.