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A sole trader is someone who runs a business by themself and trades in their own name. This is different from an incorporated business, such as a company. A sole trader is one of the four main business structures commonly used. This article will explain your legal responsibilities as a sole trader and some wider legal implications that arise when you do business as a sole trader.
Sole Trader Structure
As far as business structures are concerned, sole traders arguably have the fewest legal responsibilities. This is because a sole trader’s business is not distinct from the owner. In the eyes of the law, any assets and liabilities you attribute to your business are the same as your personal assets and liabilities.
For example, say you run a glass-blowing business making vases and glasses. You also own valuable property with your spouse. In your mind, you can probably distinguish between your property and that of your business. For instance:
| Personal Assets | Business Assets |
| House | Glass furnace |
| Car | Various glass-blowing wands and tools |
| Personal savings | Glass-making material |
| Guitar collection | Business savings |
Pros and Cons
The advantage is that you are free to do with the business as you like. You can move money and assets around as you wish.
The disadvantage is that if your business causes loss to another person or business, a court can order to sell your personal assets, like your house, to cover any damages arising from your business. In this sense, you have an obligation to yourself to ensure that your personal assets are not at risk because of any mistakes your business makes.
That said, there are certain legal obligations you owe in your personal capacity that arise from being a sole trader. We will now go on to consider the two most important ones.
Duty of Care
Legally, we owe a duty of care to our neighbours. Anyone that can reasonably be affected by your actions is (legally speaking) your neighbour.
In other words, any time you undertake some activity, such as driving a car or blowing glass, you should take reasonable steps to ensure your activity does not harm another person or their property. If you fail to take reasonable steps and your actions cause someone else harm or loss, the law concludes that you have committed a civil wrong. This wrong is called a “tort”.
As a sole trader, there is no legal distinction between your business and your personal affairs. Therefore, if you accidentally cause someone loss — such as personal injury or property damage — in the course of your business because you were careless, you personally will have committed the tort. Consequently, you may be legally obligated to make things right.
Insurance
From a commercial perspective, you will want to minimise your financial liability for any loss that arises from your negligence. This is, broadly speaking, the purpose of insurance. Essentially, you pay for the premium of a third party (the insurer) to cough up the cash if you make a mistake.
This is doubly important where you might already have an insurance policy in your personal capacity. While the law does not distinguish between you and your business, many insurance providers do. For instance, say that you run your furnace out of your garage, and it catches fire and burns down your and your neighbour’s house. Your claim may be denied if your policy has a term that will not cover any loss arising from business activity.
Therefore, even if it is not a strictly legal requirement, you should ensure you have a policy in place to cover yourself if something reasonably foreseeable happens in the course of your business.
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Tax
Each of us owes the HMRC a share of our income. The share we owe typically depends on how much income we bring in each year. Your income from your business will be treated as if it were a salary paid to you by your employer. In other words, the tax banding is the same. As of 6 April 2022, the current tax bands are:
| Band | Taxable Income | Tax Rate |
| Personal Allowance | £12,570 | 0% |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £150,000 | 40% |
| Additional Rate | <£150,000 | 45% |
As a sole trader, it is one of your responsibilities to register the fact that you run a business with HMRC. You must register no later than 5 October, two years from the date you started trading.
You can file your taxes by filling in a self-assessment. Tax for the previous tax year is owed by 31 January. Likewise, you have an obligation to keep your financial records in order so that you can complete an accurate tax return.
Key Takeaways
Operating your business through a sole trader structure is a great way to start your business. You do not have to do anything other than start trading. This is why it is a common business structure for small businesses. However, you have few responsibilities to comply with, such as a duty not to harm others in the course of your business and noting your earnings to HMRC.
If you need help navigating the legal implications and responsibilities of operating as a sole trader, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A sole trader, also referred to as self-employed, is anyone operating a business where they are the sole owner and have not incorporated the business into its own legal personality. As such, they have unlimited liability for the business’s debts and obligations.
You have a general duty of care to avoid harming others in the course of business. If you do, you can be personally liable. You must also self-assess your tax liability to HMRC.
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