Definition of a Sole Proprietor
A lone trader is someone who works for himself but is also the sole proprietor of their business.
The phrase refers to the type of business structure you employ. Because you (the business owner) and the business are considered one legal entity as a sole trader, you are entitled to all profits after taxes. You can hire staff but remain the sole owner of the company, and you must register as self-employed with HMRC in order to pay tax through the Self-Assessment system.
As the simplest business form, working as a sole trader is the most popular option for self-employed professionals in the UK.
What does it mean to be self-employed?
In general, self-employment entails working for yourself and running your own business rather than working for someone else. However, for employment law and tax purposes, self-employment means that you are fully responsible for the success or failure of your business and pay tax through Self-Assessment rather than PAYE.
Self-employment refers to your working style rather than your business structure. It means you get to choose what job you do and when you do it, but you won't get sick or holiday pay for time off.
As a self-employed person, you have the option of forming your firm as a single trader, a business partnership, or a limited company. A'sole trader' is the lone owner of a business, which means that the owner and the business are one unified legal and financial entity; whereas a business partnership functions similarly, but is shared by two or more co-owners. A 'limited business,' on the other hand, operates as its own legal entity apart from the owner, protecting their personal finances. Even if the company is controlled by a single individual, all limited corporations must be registered with Companies House and have a director.
Sole proprietorship vs. self-employment
To summarise, the key distinction between a sole trader and a self-employed person is that a sole trader represents your business structure, whereas a self-employed person is not employed by everyone else who is not subject to PAYE and does not pay tax.
There is some overlap between the two - single traders are self-employed because they manage their own business. If you work for yourself, you do not have to be a sole trader; instead, you can pick from alternative business forms such as a business partnership or a limited company.
Examples of self-employed professions include:
Freelance writers that work on a gig basis are self-employed and will be registered as sole traders.
Firm consultants who own their own small business can register as a limited corporation yet work for themselves.
A self-employed hairdresser who rents a chair at a salon is responsible for their own taxes.
A plumber who owns and operates their own plumbing business is both self-employed and a lone trader.
Self-employment Responsibilities
If you work as a self-employed person, you must notify HMRC(external link) within three months of your establishment, since you will be responsible for filing a Self-Assessment tax return each year and paying National Insurance payments and income tax on the profit you make. You must also register with Companies House if you are forming a limited company.
While these types of insurance are not legally needed for businesses in the UK, if you recruit one or more employees, you must obtain employers' liability insurance to cover claims from employees who are ill or injured as a result of their employment.
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