The sole trader

Londina

Everytime I heard about a sole trader is about his Self Assessment and that’s it....

Through my studies and work, I always dealt with limited companies, but how exactly are the accounts of a sole trader? I mean, does he have to register himself in a sort of “Companies house”?
Does he have to produce a financial statement at the end of each year?
What are the other differences with a limited company?

Bookworm55

A company is a legal construct seperate from its owners. A sole trader and his business are indistinguishable (from an accounting and business point of view)

Sole traders have to pay income tax on their profits. (rather than corporation tax)
They need to register themselves as self-employed with HMRC.
They will effectively need financial statements, but it's primarily for tax purposes.
They may need to be VAT-registered.
They can have employees: sole trader means the business has one owner, not one worker.
(eg if I have three shops, and employ managers to run them, drivers, cashiers etc, but the business is owned by me alone, it can still be a sole trader. By that point, it's probably worth being a limited company though)
A sole trader is personally responsible for the entire debts of the business.
There are tax implications with being a sole trader compared to being the only employee of a business which you own: to do with salaries and such.

I'm sure there's stuff I forgot to mention.

Londina

thanks Bookworm55 but...do they need to file Financial Statements at the end of the year like the Ltd? When is their Year End, how would you find out?

I heard sole trader don't have to keep their invoices in numerical order or just keep their accounts in excel, is it true?

burg

All business should keep base records. How they choose to store these can be down to them. Numerical order, alphabetical, date or others. Basically whichever works for them.

Financial statements are not required to be filed like limited companies are at companies house. The financial statements of a sole trader are primarily to show the business profit/financial position. These can then be used to establish taxable profits.

As for year ends. Each sole trader is entitled to chose any year end they so wish. As a short explanation that year end then corresponds to a tax year (i.e. Y/E 30 June 08 falls in tax year 08/09). The way to find out the year end is ask the client, or look at previous financial statements or tax returns

Londina

many thanks Burg! I wonder why the sole trader is not covered in more depth in the Technician/Diploma syllabus, only few things in BTC and DFS, but nothing more.

So, a sole trader doesnt need a balance sheet, its only interest is the profit & loss?

burg

Many more sole traders have and income and expenditure statement (effectively just a profit and loss). Some however, are still running large enough businesses to warrant a balance sheet.