Sole Proprietor

  • A sole proprietorship also known as a sole trader, is a type of business entity which is owned and run by one individual.
  • In this business structure there is no legal distinction between the owner & the business.
  • All profits and all losses accrue to the owner (subject to taxation).
  • All assets of the business are owned by the proprietor.
  • All debts of the business are their debts and they must pay them from their personal resources.
  • This means that the owner has unlimited liability.
  • It is a "sole" proprietorship in the sense that the owner has no partners (partnership).
  • Your sole proprietorship exists as soon as you start doing business.

Managing Finances & Administration

  • A sole proprietor may do business with a trade name other than his or her legal name.
  • This also allows the proprietor to open a business account with banking institutions.
  • Neil Smith, Plumber who is the sole proprietor and can trade as EZ Flush.
  • “Cash flow” is King and don’t go merely on profits.
  • Having box filing systems for your all your transactions is highly recommended :-
    • Outgoings/Expenses with receipts filed by months.
    • Income/Revenue with invoices raised filed by month.
    • Bank Statements filed by month.
    • Get a book-keeper or have your own spreadsheet where you reconcile your expenses and income against your bank statements.
    • Work out your monthly cash profit or loss.
  • No audit required and accounts not required in Statutory Format.
  • Can hire any number employees – Employer Help Line 0845714 3143, 08456070 143.
  • You can hire sub-contractors. Best to draft a Service Level Agreement (SLA).
  • Insurances – Need to get Professional Indemnity, Employer & Public and Product Liability depending on the nature of business.

Managing Taxes

  • You are responsible for your own Tax and NIC. This means telling HM Revenue & Customs (HMRC) about your income by filling in a Self Assessment tax return.
  • You must register as self-employed with HMRC within 3 months to avoid a penalty.
  • Self employed - 0845 915 4515, 0845 714 3143 to get a Self employment registration form (CWF1) and Unique Tax Reference Number.
  • Need to do a Personal Tax return – SA 100 0845 9000 444.
  • Sole proprietorship and the legal and tax implications start to exist as soon as Neil Smith the plumber does his first plumbing job.
  • Income Tax (2009/2010 & 2010/2011)
    Personal Tax allowance 0% £6,475 & £0 – over £100,000
    Basic Rate 20% £0 - £37,400 (£6,476 - £43,875)
    Higher Rate 40% Over £ 37,400 (£43,876)
    Additional Higher Rate 50% Over £150,000
  • National Insurance Contribution (NIC) – 2009/2010.
  • 'Class 2' NIC at a flat rate - £2.40/week, 'Class 4' NIC - 8% between £5,715 and £43,875 and1% over £43,875.
  • Earnings less than £5,075 entitled to the Small Earnings Exemption, on Class 2 NIC - you can apply for Small Earnings Exception certificate - form CF10.
  • Tax on savings income - There are two main Income Tax rates on savings income: 20 % (the basic rate) or 40% (the higher rate). The rate(s) you pay depends on your overall taxable income. Depending on your personal circumstances, some of your savings income may be taxable at the special 10 % starting rate for savings.
  • VAT registration – If annual turnover over £70,000 (2009/2010).

Advantages

  • Avoid Double taxation if you carry out your business through a company.
    • - As Corporations are separate entities from their owners they pay corporation tax on any taxable profits, owners will pay tax on their individual income.
    • - As a sole proprietor, you will not pay double tax on your business income because the law makes no difference between you, the sole proprietor, and your sole proprietorship and the business income is treated as your personal income.
  • The second tax advantage of sole proprietorships is that you can deduct your business losses to the extent of your spouse's total income as well as your total income that you may have from all sources, including interest, dividends, and profits. This only occurs if you file an income tax return with your spouse.

Disadvantages

  • A business organized as a sole proprietorship faces difficulty in raising own capital since shares of the business cannot be sold.
  • Hiring employees may also be difficult.
  • This form of business will have unlimited liability, therefore, if the business is sued, it is the proprietor's who will be responsible.
  • When the business grows, the risk accompanying the business also tends to grow.
  • To minimize those risks, a sole proprietor has the option of a partnership or limited liability company.