Statistics show that there are two million freelancers in the UK, with freelancing being the main source of income for the majority of freelancers. However, there is a sizable minority of freelancers who freelance on the side as a way to earn a bit of extra income whilst holding down a traditional 9-5 job.
The question is, what happens when freelancing begins to take up more time than the main 9-5 job? Maybe it’s time to make freelancing into a full-time occupation. If you’re looking to turn your hobby into your career, you might want to consider registering as a sole trader.
What is a sole trader?
A sole trader is a person who works for themselves, they are self-employed. They may have been an ex-employee or a part-time freelancer, who decided that they want to run their own business.
Advantages of setting up as a sole trader
Retain your profits
The great benefit of being a sole trader is that you’re able to keep all of your profits after tax. As you work on your own, you’re not required to split your profit with others which means more is designated to yourself.
However, it should be noted that a proportion of the profits you make will have to be reinvested back into the business.
Working for yourself = control
When you’re an employee, there is often very little control regardless of your position. You may have a great idea or vision, which is quickly stifled by upper management or the internal politics of work. This can be very frustrating.
The benefit of being self-employed is that you are your own boss. The only person who needs to be consulted is yourself. This means that you can choose what direction you want your business to take. It allows you and your business to be more flexible and adaptable. You’re able to choose where and when you work, which can be really useful when balancing work and family life.
Being in control allows you to make faster decisions, as there is no other form of management required.
Easy to set up as a sole trader
Setting up and registering as a sole trader is a really simple process and is free to do. It doesn’t take long and only requires you to register with HM Revenue and Customs. The registration process can be completed online meaning that you can complete it in the comfort of your own home.
If you choose to become a sole trader, you will be required to alert HMRC that you are registering and paying your tax via ‘Self Assessment’. This means that you will need to file a tax return every year.
There are of course some rules and responsibilities when you register as a sole trader, so ensure you follow Government and HMRC rules when setting up as a sole trader. For more information to set up as a sole trader, make sure to check out the government website.
Great place to start as a new entrepreneur
One of the benefits of being a sole trader is that it’s particularly easy to change your mind. As previously mentioned, those who want to start a business often have to balance it with a full-time job. Operating as a sole trader can be a good starting point and allows an entrepreneur to start a business. As your business grows, you still have the option to form a limited company, which comes with benefits such as limited liability, tax benefits and more.
For more information about setting up a sole trader or limited company, check out SME Loans useful guide.
Disadvantages of setting up as a sole trader
The main negative of becoming a sole trader is that you are fully liable for your business’ finances should it fall into debt. This means that your personal assets are at risk, should you need to repay your loan. Unlimited liability stretches to all aspects of the company, so you are also liable for accidents, such as property damage. Therefore, being a sole trader can be more financially risky should things go wrong.
Taking a break can be tricky
One of the negatives about being self-employed is that when you stop working, you stop earning. As an employee, you’re entitled to holiday pay which means you’re not losing money. In the case of a sole trader, there is nobody else to delegate work to, which means that you effectively stop doing business. This can be off-putting for those who don’t want to worry about finances whilst they are on holiday.
This, of course, doesn’t mean that you can’t take breaks, it’s just that you will need to carefully plan them in advance and may have to take reduced holidays.
Limitations of a sole trader
As a sole trader, you will be primarily working on your own, this may limit certain business opportunities. For instance, if there is a large contract which requires a lot of work, a sole trader may be overlooked in favour of a limited company who can complete the job more efficiently. This can be very disheartening and may leave you with having to take less fruitful jobs.
Securing external and internal funding as a sole trader can be difficult. The business structure of a sole trader is viewed critically by most traditional lenders, such as banks, which make it difficult to secure external sources of finance. Traditional lenders perceive that a sole trader is a risky client and are less inclined to offer loans. When they do offer loans, they are often a fraction of the amount needed and come with shorter repayment periods and a higher interest rate.
Raising funds internally can be equally as difficult as it often requires the sole trader to dip into their personal finances to help secure funding.