What is Sole Proprietorship in the UK?

As an early-stage business, you should consider different business structures that you can adopt. One option is a sole proprietorship (sometimes referred to as being a sole trader). A sole trader is a type of business structure, which is different from a company. It will influence whether you pay personal income tax on the money that you make as part of your job. This is sometimes also referred to as an unincorporated business. This article will explain some of the key features of sole proprietorship in more detail. It will also touch on some of the pros and cons of using a sole proprietorship business structure. 

What is Sole Proprietorship?

A sole proprietorship is an unincorporated business with a sole owner who pays personal income tax on business profits. It is commonly used when you are the sole owner of a business. Another time it can be used is if you are acting in your own capacity or trading through your personal name. 

As a sole proprietorship, your business income is not separate from your own personal income. In other words, you do not need a separate business bank account. This is because your personal assets and business assets are treated the same. As a result, you will also have personal liability for your business debts. This means that if you have financial difficulty, you will be wholly liable. 

Sole proprietorships are very easy to set up. All you need to do is inform Her Majesty’s Revenue and Customs (HMRC). You will then have to pay tax through Self-Assessment. In doing so, you will also need to file a tax return every year.

How is a Sole Proprietorship Different from a Limited Company?

There are a number of differences between a sole proprietorship and a limited company. A limited company is treated as a separate legal entity from you as a person. 

With this type of business structure, your business debts are not the same as your personal debts. By using a limited company structure, your business entity will pay separate taxes to your personal income tax. Therefore, you will not have personal liability for your losses. 

Why Use a Sole Proprietorship Model?

Working as a sole trader or sole proprietor can be beneficial for your business. It can help you to avoid the hassle and upkeep of owning a company. Further, if you have a company, you will have to deal with Companies House. This is the UK regulatory authority that oversees company law. Under a sole proprietorship, however, you simply need to make sure that you file your taxes correctly every year through self-assessment. 

As a result, sole tradership is a popular option among small businesses that are often working using their personal names rather than under a business identity. They are easy and quick to set up and can be a good way to start your business operations.

On the downside, however, you will often end up paying more through personal income tax than if you were paying corporation tax on profits. This is because the UK personal income tax bracket can reach as high as 45%, whereas corporation tax is usually at around 19%. 

Further, a limited liability company structure will allow you to protect your personal assets in the case of business losses. This is because the business bank account is separate from your own money. Under a sole trader model, on the other hand, you would have personal liability for debts. 

Finally, if you are planning on issuing shares as part of your business, then you will also want to make sure that you are running as a limited company. This is important if you plan on raising funds for your business.

Can I Switch from a Sole Trader Model to another Business Structure?

If you wish, you can switch from operating as a sole trader to operating under a different business structure. One example of this is becoming a limited company. This is usually a good idea if you have started your business as a sole proprietor to get your operations going, and are now looking to secure investment through issuing shares and avoiding personal liability for potential future business debts. 

To switch to a different business structure, you will have to form your limited company and then get in touch with HMRC to let them know that you are de-registering as a self-employed proprietor.

Key Takeaways

As a business owner, you should be aware of the different business structures that you can adopt as part of your operations. One common model is a sole proprietorship, which you can use if you are the sole owner of a business. It is a common structure for early-stage businesses and for individuals who are trading using their personal identities. Under this model, you will pay personal income tax on your profits, and you will also be liable for debts.

It is possible to change your sole trader structure at a later point, which could be useful if you are looking to issue shares or to avoid personal liability. If you need help navigating the legal implications 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.

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