Sole trader businesses are often viewed as the simplest and least complicated type of business entity.
In themselves, they do not require a registration with Companies House and there is no set fees payable when becoming a sole trader.
Revenue and Customs should be notified of the intension to trade and this is often beneficial as they can provide help and advice on starting a business from a taxation point of view.
Sole traders typically consist of one owner who also runs and works in the business. This form of business entity and the person who owns it are viewed as being the same party from a legal standpoint.
Thus the owner is directly responsible for the debts of the business and would be required to make good any shortfall from their personal savings or other assets.
Sole Trader and Taxation
The entire profits from a sole trader business would form part of the income of the owner from a taxation point of view.
Regardless of the amounts which were withdrawn from the operation, any gains would be added to the owners other income (if any) and would be taxed at the standard income tax rates.
This can provide to be a significant disadvantage, particularly in businesses which might require profits to be retained in order to purchase additional stock items, such as jewellery retailers.
In the above example, the operation might show large profits due to the increase in stock at the year end. However, the amounts which have been actually distributed to the owner might be very small or even nil.
This would not shield the owner however in respect of the addition shown of their income tax returns.
They would essentially be paying tax on money which the business has accumulated, but which has not yet been distributed.
