Am I A
Sole Trader, Contractor Or A Business

Help & advice for Businesses

Fusion Knowledge

One of the biggest questions faced by freelancers is precisely what kind of organization should they be? Choices are between the status of a limited company, sole trader, or a licensed contractor. The three respective business structures are unique and have several benefits as well as downsides. It is usually up to an individual to make an evaluation, keeping track of all facts and general information related to it.
At this point, it isn’t sure which type of business structure is better in terms of benefits because it rather depends on a professional individual’s prior requirements. Either sole trader status or limited company or like can suit based on how far its core attributes are compatible with one’s situation, along with the degree of a comparative advantage they bring.

SOLE TRADER

A sole proprietorship is not a legal entity separate from its owner. In this case, the business owner personally owns all of its assets and is solely responsible for its operation. The owner keeps all business profits after paying taxes on them. In the case of business failure, the proprietor is handed with responsibility and bears the loss.
An important reason why sole proprietorships are so popular is that they are the easiest and most economical way to organize a business with only one owner. In these types of companies, you must not do anything special or present any document to establish it, in addition to the licensing process, the permit and other regulatory requirements found in your state and location for a business.
The example of a sole trader can be traced to a wide variety of cases, the most popular ones being merchants and service providers in sectors of plumbing, hairdressing, automobile mechanics, etc. As the horizon of sale trading expanded, we now have the structure in other different forms, including internet-based entrepreneurs, self-employed consultants, and freelancers. In the UK, you are not required to register your business with the Companies House, but you still have to become a taxpayer with HMRC.

INDEPENDENT CONTRACTORS

If you agree to perform specific work for an employer, and you carry out your work according to your process. Outside the employer’s daily control, you are an independent contractor. Independent contractors aren’t considered employees; they work on their own and do not receive most of the rights and benefits that employees receive from their employers or by labour laws.
Unlike an employee, if you are an independent contractor, you set the terms of your employment with each employer, and you own your work. For example, if you are a writer working as an independent contractor, you retain the copyright of your work even after giving it to your employer, unless you explicitly waive your copyright.
Independent contractors work on their own and do not receive most of the rights and benefits that employees receive. For example, as an independent contractor, you will receive remuneration according to the terms of your agreement, not according to a scheduled salary.
The umbrella company is an intermediary between the freelance and the end customer who is responsible for managing invoices, payments, taxes, etc. How does it work? The freelance worker contacts the final client who wishes to hire him either directly, responding to a job offer, or through a recruiter (worker of a personnel selection company).
Once they have agreed on daily rates and the details of the project, the final customer signs a contract with the umbrella company for the provision of the indicated services. The freelancer signs an employment contract with the umbrella company that describes their employment relationship. This contract must only be approved once when you start working with the umbrella company. The umbrella company assigns the project to the freelance.

BUSINESS

A business is a system designed to obtain benefits through the performance of an activity, the sale of products, or the provision of a service that we can offer to other people. It refers to how a person or organization obtain money in exchange for products or services.
Some business examples may be a mechanic who acquires a store and tools to earn money by repairing vehicles. Then creates a website to sell cosmetic products online or a news portal that has many readers and sells advertising space to advertisers. Here, each of the businesses is different models and ways to earn money.
Businesses form into companies, and, a company is an entity or organization created by one or several people to obtain money through the production and marketing of products and services to customers. It refers to the legal aspect and the characteristics that the organization has.

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ADVANTAGES OF BEING A SOLE TRADER

CONTROL AND OWNERSHIP

As a single owner, the whole business stake is owned by you. You bring in your own investments and run the business according to your will, strategies, and decisions. There is no intervention from the outside as the company stays entirely in your control. It can have a favourable implication because once you establish a successful venture, you can take steps towards selling it off to a suitable buyer.

CONSTITUTED EASILY AND ECONOMICALLY

Starting a business as a sole trader does not follow a lot of paperwork or complications. You are exempt from registering your business with Companies House, and the rest of the process of setting up the venture is quite easy as well. At the same time, the sole trading business has a limited scale and therefore, requires minimal initial investments. Most sale traders in the UK can set up ventures by financing through their savings. Depending on your business model, funding your venture with capital is more pragmatic and opens an excellent opportunity for you to delve into proprietorship.

EASY TAX STRUCTURE

In the UK, you are liable to get registered with HMRC and actively pay your taxes. For sole traders, it is relatively easy to do so, and there are not many complications concerning tax that you can face. You are needed to pay tax as well as National Insurance Contributions (NIC) on your earnings.

PROFIT RETENTION

As a single owner, all profits are directly kept by you and shared by no other business partners, which is an attractive prospect for many business owners who set up their ventures in profitable industries and accumulate huge profits?

PRIVACY

As mentioned above, a sole trader is not legally required to register with Companies House. Therefore, the business can keep a lid on information about it. You can achieve greater privacy as no information of activity is needed to be given out.

THE DOWNSIDES OF BEING A SOLE TRADER

DIFFICULT TO RAISE CAPITAL

Single owners usually rely on their savings or assets to finance their only trader business. For many aspirants, it can be challenging as the growing economic crisis hardly allows an average citizen to sustain their savings, let alone set up a business venture. Difficult to seek loans, Banks are reluctant to show confidence to single business owners, as they cannot offer any guarantees. At the same time, there is no chance of liquidation and not everyone’s credit history is suitable for loan approvals.

LIMITED LIABILITY

There is no protection in this structure because no legal obligation separates your business from you. It means that you are responsible for paying your businesses’ liabilities or debts in any case. Here, any crisis or failure of a company is treated as a result of the owner’s actions and is fully responsible for it.

EASY TAX STRUCTURE

In the UK, you are liable to get registered with HMRC and actively pay your taxes. For sole traders, it is relatively easy to do so, and there are not many complications concerning tax that you can face. You are needed to pay tax as well as National Insurance Contributions (NIC) on your earnings.

NO BUSINESS CONTINUITY

In the event of your death, your business can no longer continue unless you fully transfer ownership of a company to another single party.

RECRUITMENT COMPANIES DO NOT HIRE SOLE TRADERS AS CONTRACTORS

According to the Income Tax (Earnings and Pensions) Act 2003, an agency cannot hire you as a contractor between their clients. Which is because then the agency would have to treat you as an “employee” and in that case, you will be entitled to bear income tax and National Insurance Contributions (NIC) from your earnings. For this reason, employers do not generally prefer hiring sole traders for contractual work.

BENEFITS OF CONTRACTUAL WORK

INDEPENDENCE

It seems obvious, but that could why you are considering this change. As an independent contractor, you don’t have to work for another person. You may be able to set your schedule and complete work assignments whenever you want, depending on the type of work. You should be able to negotiate payment rates and the payment schedule, but you may need to keep an attendance sheet if you work with an hourly rate.

LIMITED LIABILITY

There is no protection in this structure because no legal obligation separates your business from you. It means that you are responsible for paying your businesses’ liabilities or debts in any case. Here, any crisis or failure of a company is treated as a result of the owner’s actions and is fully responsible for it.

OBTAINING A CONTRACT

Most employees do not have a written agreement unless they work under a union contract or are highly paid executives. But an independent contractor can always have a deal. Obtain a written commitment from each person or their employer.Having a contract explains “what happens when”. Having an arrangement can resolve many disputes before they begin, and you can make a deal to court to receive payment, if necessary.

DEDUCT BUSINESS EXPENSES

All expenses that you must pay to manage your independent contractor business are deductible to you as business expenses. That includes business trips and the costs related to having a home-based business. Of course, you will have to file a business tax return to get the deductions, but it is worth minimizing your income and income taxes.

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