Is Being Self-Employed The Same As Being A Sole Trader?
If you’re not familiar with all of the terms around business ownership you might be wondering if there is any difference between being self-employed and being a sole trader.
Although these terms are often used interchangeably, they do have different legal definitions. So let’s take a look at the difference between them.
What is a sole trader?
“Sole trader” refers to the business structure.
A sole trader carries out business as though they are an individual. This is different from a limited company which is a separate legal entity from the individual.
A sole trader is able to use a business name, but there is no legal difference between the individual and their business. This means that the individual is personally liable for all business debts. This again is different from a limited company, where the company is liable for all business debts, thus protecting the individuals running the company.
What happens if a sole trader forms a limited company?
If a sole trader decides to register a company they will lose their status of being a sole trader, but they might still be self-employed.
What does it mean to be self-employed?
The term “self-employed” dictates how an individual works for the purposes of tax and employment law.
If an individual does not have a contract of employment and does not receive their pay through PAYE, they are usually classed as self-employed and will need to pay their own tax through Self Assessment. These individuals have no rights when it comes to employment law.
Let’s look at how someone is classed as self-employed for the purposes of tax and employment law:
In general, the individual will be classed as self-employed if the following criteria apply:
- They run their own business
- They have the ability to decide if and how to perform work
- They are able to subcontract their work
- If any work is carried out unsatisfactorily, they have the responsibility to correct it without being paid extra
- They are working on a fixed price basis rather than an hourly rate
- They are entitled to work for other clients
- They use their own materials and tools to carry out the work
If most of the following criteria apply, the individual will probably be classed as self-employed for the purposes of employment law:
- They need to provide quotes to obtain work
- They lack direct supervision
- They provide regular invoices for payment of work
- They complete annual Self Assessment tax returns
- They have no entitlement to holiday or sick pay
- They have a contract that includes terms such as “self-employed”, “consultant” or “independent contractor”
It is important to differentiate between individuals who are self-employed and those who are employed directly. For example, employees are entitled to National Minimum Wage and paid holidays, whereas self-employed workers are not.
Is a sole trader always self-employed?
If someone conducts business as a sole trader, it is likely that they are self-employed. However, it is possible for them to be an employee for another business at the same time.
If a sole trader converts to an incorporated business structure by starting a company, they can remain self-employed, or they can choose to become employees of their own company.
So to sum up, the term self-employed has a different meaning to being a sole trader, although the two terms can apply to the same individual.
In the same sense, someone who is self-employed may not necessarily be a sole trader; they could be running a limited company.
- 22 Oct 2021 - How Can You Avoid Creditor Pressure As A Director?
- 14 Oct 2021 - What Is Dividend Tax?
- 08 Oct 2021 - Is Being Self-Employed The Same As Being A Sole Trader?
- 29 Sep 2021 - Common Budgeting Mistakes Made By Startups
- 24 Sep 2021 - Misconceptions Of Setting Up A Business