Sole Trader vs Self Employed – What’s the Difference?

If you’re self employed or looking to start a business, you might be confused about some of the terms used to describe running your own enterprise.

We explore what a sole trader is, explain self employed business structures, and discuss the responsibilities you have as an entrepreneur.

Sole trader is the most commonly used business structure in the UK. When you operate as a sole trader, you’re entitled to all profits from your business. You’re also responsible for all tax and other business expenses.

The Difference Between Sole Trader & Self Employed

The difference between sole trader vs self employed is straightforward. The majority of self employed business owners are sole traders.

The term sole trader refers to the structure of your self employed business. If you’re looking to start a business in the UK, you also have the option to use a limited company, or a business partnership structure.

A sole trader is the most straightforward structure to use for self employment. It is quick to set up and there is not much admin work involved. Self employment means you work for yourself rather than for an employer.

This means you are also responsible for processing your accounts, including submitting tax returns and making the correct national insurance contributions.

What’s a Sole Trader?

A sole trader is a stand alone individual who runs the business independently. This means they are legally in charge of their business and have sole ownership.

The profits are solely for the owner, once all the tax and national insurance has been paid. A sole trader completes an annual self assessment for tax. They must register with HMRC when first setting up the business, or as if their self employed earnings have exceeded £1,000 in the previous tax year.

Someone who is self employed as a sole trader does not need to register with Companies House or become a company director.

Sole traders can hire staff to work with them but the owner remains in full control of the business. This means that once they paid their staff, all remaining profits are legally the sole trader.

Being a sole trader is the most common form of business entity because of the quick process to set up. Further down the line, you can opt to change to another structure should you wish to.

What’s a Business Partnership?

Running a business partnership means there is more than one owner. You can share the business with one other individual or multiple people.

Each partner shares all responsibilities of the business including things like dealing with losses and paying out expenses.

Profits are shared amongst the partners and each partner is responsible for their portion of the tax owed on that share. One person from the partnership is nominated to be in control of the tax return and business records.

What’s a Limited Company?

A limited company refers to one of two business structures. They fall under the category of limited by shares or limited by guarantee.

They must register with Companies house.

Limited by shares means:-

  • The business is legally separate from the people running it.
  • Business finances are kept separate from personal finances.
  • The business has shareholders.

Limited by guarantee means:

  • The business is legally separate from those running it.
  • Finances are kept separate from personal funds.
  • The business has guarantors and a guaranteed amount.
  • Profits are invested back into the company.

What is Self Employment?

Self employment refers to individuals who run their own business and are therefore, not employed. They control their own finances including the annual self assessment.

The self employed do not pay tax through the PAYE system. Instead, they register with HMRC and submit annual tax returns. At this time they pay their tax and national insurance too. This is done through the government gateway website.

Those individuals who choose to become self employed can choose which business structure they wish to adopt. They can opt for sole trader, business partnership or set up as a limited company.

Self employed workers can include; sweet businesses, cake makers, cleaners, dog walkers and mobile catering vans.

See Also: Legal requirements for businesses – a guide on all responsibilities when starting and running a new business.

How to Register as Self Employed

Registering as self employed is not a difficult or lengthy process. Knowing the legalities  involved is key to setting up your business smoothly.

The steps below are the legal steps you need to take to register as a self employed business:

  1. Decide if you wish to be self employed as a sole trader, limited company or a partnership.
  2. Choose your business name.
  3. Make a list of all the business records you will need to keep on top of.
  4. Register with HMRC (this must be done within 3 months of setting up).
  5. Check if you need to register for VAT.
  6. You can then make sure you have the relevant insurance and public liability insurance.
  7. Complete any relevant training required. 

Legal Requirements for Sole Traders

Sole traders, like any other business entity, must follow certain legal requirements to stay on the right side of the law. Failure to follow such regulations could result in legal or tax problems.

When you become self employed, there are certain responsibilities you must uphold. You are solely responsible for completing your annual tax return. This includes all details relating to your profits or losses for the tax year. You must keep accurate records of your income and all business expenses. You must pay tax if applicable and the national insurance contributions.

It is also the sole trader’s responsibility to make sure they are up to date with UK legislation associated with their business. They should also register with their local council if applicable. Businesses such as childminders and cake makers may have to do this.

They might also need to register for VAT which can be verified online. When sole traders wish to hire staff they will need to take out employer’s liability insurance. You can also look at the benefits of having your stock covered by insurance and even your professional reputation can be catered for. This is called professional indemnity insurance.

See Also:


Do Sole traders have to register with companies house?

Sole traders do not have to register with companies house or appoint a director. The individual is responsible for the runnings of the business.

Can sole traders have employees?

Sole traders can hire employees to work with them and pay them a wage. The sole trader remains in full charge of the business and its finances.

Can a sole trader be VAT registered?

Sole traders can be voluntarily VAT registered if it makes good business sense. If their turnover is more than £85,000 then they must register. It’s important to speak to an accountant before making this decision.

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