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Legal Issues for Sole Traders

Thursday 5 September 2013

Self-employment as a sole trader can be a great choice for those requiring more control over their time. The financial crisis has also meant that many people forced out of employment have found themselves working as self-employed sole traders.

Although it is in many ways the simplest form in which to operate a business, there are important legal considerations that should be taken into account.

Sole Traders: An Unincorporated Business Model

A sole trader is an unincorporated business model, where a person runs their business as an individual.

As it is unincorporated this makes it much easier to set up; there are no requirements to register the business or the business name and much less paperwork has to be filled out. Given this, there are still legal and taxation requirements that the sole trader must fulfil.

One of the primary benefits is that a sole trader keeps the whole profit from their business after income tax has been deducted.

Maintaining Sole Trader Business Accounts

In order to make sure that the sole trader pays the correct amount of tax on their turnover, they must register as being self-employed at HMRC within three months of starting up. Failure to do so will result in a £100 fine. Once registered, the sole trader will need to fill out a self-assessment tax return, which is why it is important to keep track of all income and expenditure of the business.

Sole traders who have turnover of over approximately £79,000 per annum will also be subject to paying value added tax (VAT), and must therefore register to do so. Records will need to be kept of VAT collected from customers and VAT paid out in the course of business, so the difference can be paid to HMRC.

Business Names for Sole Traders

As a sole trader, the terms ‘Limited’, ‘Ltd’, ‘public limited company’ and ‘Plc’ are unusable. As are any words deemed to be sensitive or offensive, or anything to suggest a connection to the government or any local authority.

As there is no requirement to register the business name there is little protection. However, it is possible to register it on the National Business Register, to prevent others using the name in the future.

Before this, traders should make sure that the name is not the same or too similar to any other business names that are registered at either Companies House or on the National Business Register, as well as not operating in the same locality. Any conflicts or similarities are likely to cause problems in the future.

Consumer Protection Issues for Sole Traders

Consumer protection is still an issue sole traders need to be aware of. As with any other types of business model, a sole trader must not made any false or misleading claims about goods and services, and must provide goods to a satisfactory level of quality, matching how they have been described.

All services provided must be performed with reasonable care, skill, time and cost, and all prices of goods offered for sale must be in writing. It is important that these standards are met as the sole trader is also liable under the Consumer Protection Act 1987 if a faulty product caused damage or injury, unless the danger could not have possibly been foreseen at the time of sale. It should be noted that unlimited personal liability is one of the main disadvantages of being a sole trader.

Any personal data of consumers must also be registered by the sole trader with the Information Commissioner’s Office, in line with the Data Protection Act 1998.

Conclusion

Individuals operating small businesses in low risk environments can certainly gain financial and administrative advantages from operating as sole traders.

However, as an unincorporated business model, there is no corporate veil distinguishing between the assets of the business and those of the individual meaning that person is personally liable for any liabilities incurred by the business. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.