Why is sole trader sometimes a better business status?
When you first start out as self-employed in business, you might not be ready to register as a limited company. Instead, there is the option to work as a sole trader.
This is more than just a description – you can also register a limited company as the sole director and shareholder, and pay yourself via a salary and dividends.
So what actually is the difference when you are a sole trader, compared with being the sole owner of a registered limited company?
Personal liability and taxes
The most important distinction is that when you are a sole trader, you are liable for everything you do in business, but you only pay personal taxes.
Examples of the taxes and similar annual costs you might need to pay include income tax, National Insurance contributions and repayments on your student loan when your earnings are over the relevant amount.
In contrast to this, companies are required to pay things like corporation tax – so by staying as a sole trader, your overall tax bill will be different.
Generally speaking, the more you earn, the more it makes sense to register as a company, but if you like to keep things simple even at slightly more financial cost, sole trader status is the easier option.
Accounts and reporting
The same is true when it comes to calculating your taxes in the official sense of filing accounts – and sole traders have the option to self-assess, which gives you direct control of calculating what you owe and sending the figures to the government.
If you register as a limited company, you must submit accounts that have been prepared by an accountant, who in turn will charge professional fees for doing the work.
So again in this sense, being a sole trader is the easier option – and you can still get an accountant to help you with your figures even if you’re not confident enough to compile your annual tax return yourself.
In practice, many sole traders appoint a named accountant as their ‘agent’ for dealings with HM Revenue & Customs, and this gives them permission to take care of your accounts on your behalf so that even as a sole trader, you don’t need to worry about much beyond giving them your earnings and expenses figures at the right time each year.
Access to business banking
Money management is one area where your status can have a big impact on the options that are available to you.
As a sole trader, you may be able to continue using a personal account for your business finances – you might even want to set up a secondary account like an Arro Personal Account to do this with a separate balance just for your professional activities.
As a company, your bank is unlikely to want you running your finances through a personal current account, and may try to force you onto a business bank account with high transaction charges and management fees.
The Arro Business Account is an alternative here, with competitive fees that are published in full upfront. It’s available to companies and partnerships alike, and there’s no credit check or awkward questions about your company’s finances.
We know that when you are just starting out, it’s not always possible to predict exactly how much you will have coming in – and as long as you stay in the black, we don’t put any minimum deposit demands in the terms of our business accounts.
Easy money management
Whether you choose to be a sole trader or register as a company, you need to be able to manage the money you make through your professional business, and the Arro Money online dashboard is designed from the ground up to suit personal and business accountholders alike.
With powerful functions to sort and filter the money moving through your account, you can easily track down a particular transaction to check you have paid a bill or received payment on an invoice – you can even filter out all debit card payments, ATM withdrawals or Direct Debits if you want to see which methods you spend the most on.
Both accounts are upfront and honest about transaction fees, and the Arro Personal Account even has a ‘pay as you go’ option with no monthly fee, ideal if you carry out very few transactions directly through the account and want to avoid admin charges.
The decision to be a sole trader or a company is ultimately yours – but Arro Money are here to support you in business either way.