Sole Trading is the term used to describe a person working for his or herself without having been incorporated as a limited or unlimited company.
The easiest way perhaps of explaining this is to use the example of an individual working from home on behalf of a limited company; in this instance the individual working from home would invoice their clients using their own name unless they chose to do differently.
How Does Sole Trading Differ From Being a Limited Company?If you are a sole trader then in the eyes of the law you are just that; an individual working on your own and working for others as a single person. With a limited company it is expected by law that there is another person - at least one other person - working alongside you in the capacity of a director of the company. You too would need to be a director of the company if there were no other persons involved.
As a sole trader you are expected to submit your own accounts and keep accurate records of all your business dealings whereas a limited company is expected to employ the services of an accountant and is expected to submit yearly or biannual accounts giving details of their financial affairs.
A limited company has limited liability in the event of financial difficulties; if the company is forced into liquidation or bankruptcy then it is the company - and not the individuals running it - which is liable for any outstanding monies. However if you are a sole trader you are solely responsible for any unpaid debts and any difficulties you might encounter of a financial nature.
Can Anyone Be a Sole Trader?In theory yes, anyone can become a sole trader, providing they are of the legal age which is eighteen. A sole trader can trade in anything - within the confines of the law - such as items of food, clothing, etc - or they can offer their services as a freelance employee.
Tax and InsuranceAs a sole trader you - and you alone - are responsible for the paying of your tax and National Insurance contributions. In effect this makes you self employed and in the eyes of the law you are responsible for making sure that your earnings are declared and the relevant contributions are paid.
It is worth noting at this juncture that not paying tax is a criminal offence and you may be liable to a custodial sentence plus a large fine - as well as having to pay any unpaid duty. Not paying your National Contributions can have a knock on effect to your state pension when you reach retirement age.
VAT RegistrationYou should not be charging VAT against any services or goods sold unless you are making over £40,000 per annum. If this is the case you should apply for a VAT Registration number which you must display on all paperwork.
Trading Under another NameYou can - as a sole trader - still use another name in the same way as a group of people working together would incorporate a company name. The proviso here is that you stipulate on all paperwork that you are - for example - Joe Bloggs trading as Company X.
You must inform Companies House if you wish to trade in this manner and they will direct you as to how to proceed.
If you are in any doubt you should speak to your local development agency or Companies House who will be able to help with advice and support where possible.