What Is a Sole Trader (Sole Proprietorship)

A sole trader business structure is ideal for individuals looking to start a business with minimal administrative burden and total control over operations.
However, it's important to consider the implications of unlimited liability and ensure that this structure aligns with your business goals and risk tolerance.
Solo entrepreneurs enjoy numerous benefits, including control over their business decisions, financial independence, streamlined operations without managing employees, and enhanced privacy in financial dealings.

Sole Trader Meaning

A sole trader is an individual who runs and owns an entire business enterprise. It is the simplest business structure in the UK, which requires minimal formalities to set up and operate, making it a popular choice for many entrepreneurs and small business owners.

How to Register a Sole Trader Business

There is no formal process for registering as a sole trader because there is no legal distinction between the individual and the business. The only official registration required is for the individual to register as self employed with HMRC (Her Majesty's Revenue and Customs) for tax purposes. Registering the business with Companies House is unnecessary and is required for limited companies.

Find out more: Sole Trader (or Sole Proprietorship) Explained

Must I register as self-employed if I start a business as a sole trader?

Sole traders are taxed as individuals. Therefore, you must register as self-employed. You must file a self-assessment tax return each year, reporting your business income and expenses. You will pay income tax and National Insurance contributions based on your profits.

How do I set up as a sole trader (sole proprietorship) business?

To set up as a sole trader (sole proprietorship), simply register as self-employed with HMRC. This will allow you to report your income, manage your tax obligations, and operate your business legally.

Do I need to pay income tax if I register as a sole trader or a limited liability company?

Yes, as a sole trader or a limited company director, you must pay income tax on any earnings above the personal allowance of £12,570 and trading allowance of £1,000 for the 2024/2025 tax year. This tax is calculated on profits that exceed these thresholds.

Do you need a business account to run your business as a sole trader?

You are not legally required to open a business bank account as a sole trader since there's no legal separation between you and your business. However, keeping your business and personal finances separate is wise, as it simplifies accounting and tax reporting.

What are some advantages and disadvantages of running a business as a sole trader?

Running a business as a sole trader offers unique advantages and challenges, appealing to individuals seeking full control and flexibility in their work.

	Advantage	Disadvantage
Autonomy	As a sole trader, you fully control all business decisions without consulting partners or a board. This freedom allows you to pivot quickly and create a business that reflects your vision.	You bear the entire responsibility for any errors or losses, which can be stressful and financially risky, as no one can share the load or help in crucial decision-making.
Opportunities	Sole traders have the flexibility to enter various fields, from skilled trades and freelancing to consulting. This structure is open to individuals from diverse backgrounds, making entry straightforward.	Operating as a one-person business can restrict growth opportunities. Expanding may require more time and effort, as fewer resources and hands-on help exist.
Scope of responsibilities	You oversee all financial aspects, from tax to National Insurance. Although challenging, this can help build business skills and financial literacy, strengthening your understanding of business finances.	Managing the non-business aspects of your venture, like finances and compliance, can distract you from your core mission. These demands require time and energy that could otherwise be spent growing and developing your primary business activities.

What do I need to know about sole traders and national insurance contributions?

As a sole trader, you're responsible for paying specific National Insurance contributions, primarily Class 2 and Class 4, with the option to pay Class 3 for additional state benefits.

These contributions support your eligibility for certain state benefits, including the State Pension, so understanding each type and its rates is essential for staying compliant and maximising your benefits.