Trading Options -          Sole Trader

This form of self-employment is perhaps the most common way of being in business and certainly the simplest.  It is in effect the default option because the moment a person actually starts to trade they will be a sole trader unless they have already either set up as limited company, or agreed to start the business with someone else.

Operating as a sole trader is informal.  The individual has no one to answer to other than themselves and there is little by way of regulation governing the way they keep records or the format of their accounts.

Perhaps the biggest disadvantage of being a sole trader is unlimited liability.  Because of the informality of self-employment generally the debts of the business are the personal responsibility of the sole trader and if a creditor cannot be paid the sole trader may be declared bankrupt resulting in the loss of his home and his personal belongings.

Sole traders pay Income Tax on the whole of their profits irrespective of whether or not they have drawn those profits from the business.  They also pay class 2 and class 4 National Insurance.  For the 2008/09 year class 2 National Insurance is £2.30 per week and the class 4 liability is 8% of profits between £5,435 and £40,040, and 1% of profits above £40,040.