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Sole Trader

Sole trading is when an individual is the only owner of the business and has complete control over the way it is run.

The law makes no distinction between the business and a sole trader. This unlimited liability means that any business debt can be met from the owner's personal wealth if the business fails. And the business usually ceases on the owner's retirement or death.

A sole trading business is usually small in size, with a low turnover, and few, if any, employees. But there are an estimated 3.7 million active businesses in the UK and over 2.3 million of these are businesses without employees (class zero businesses).

This majority of sole traders are in the service sector, including photographers, plumbers, hairdressers, shops, real estate agencies and bed & breakfast hotels. Some 24% of the UK 's 2.3 million size class zero businesses are in the construction sector and 18% are in business-related services.

Starting the Business

You will need to fulfil certain legal requirements before you can open for business:

Put it on paper:

If you are going to trade under a name different to your own personal name you must display the name(s) of the owners and an address where documents can be served on all business stationery and at your premises. Design letterheads, business cards and signage accordingly.

Use the right name:

A business name means the name of your business if it is different to your your own name.

It is not compulsory to register a business name but you can do so with the National Business Register.

You also need to be careful about choosing a name since the wrong name can get you into difficulties.

Certain words and expressions like international, federation and registered are restricted under the Business Names Act 1985 and the Company and Business Names Regulations 1981.Companies House and the National Business Register have lists of these words and details of how to obtain approval to use them.

Your business name can not be the same or too similar to that of another business, trademark or company. If it does conflict you could face legal action from its owner. Check phone books, trade journals and magazines to ensure against clashes and you can run free name checks against all these via the National Business Register as well as the Trade Marks Register and the Patent Office and the limited companies names index at Companies House.

To be absolutely sure that you can use a name, contact a solicitor to perform the checks or register your name with the National Business Register who will do the checks for you and ensure nobody copies it the future or passes it off as their own.

Inform the authorities:

You must register as self-employed with the Inland Revenue within three months of starting up or face a £100 fine. The three month limit starts from the last day of your first month of trading.

Tax and VAT

As a sole trader your profits are taxed as any other income by the Inland Revenue. And as you are self-employed your tax will be self-assessed. The amount you owe is calculated after business expenses and personal allowances have been deducted. Your income will fall under tax Schedule D and as you will be paying income tax twice a year so it will pay to put money aside.

As a self-employed person many of your business expenses can be deducted from your taxable income, such as overheads on your premises, travel, delivery costs and trade association subscriptions. But you will have to pay capital gains tax if you sell or give away any assets.

You will also be paying National Insurance Contributions (NICs) to the Department of Social Security. Class 2 NICs are charged at a small weekly rate and the level of Class 4 contributions you pay depends on your profits.

If your taxable turnover exceeds £58,000 in the past 12 months or will do so in the next 30 days you must apply for value added tax (VAT) registration. This means you will be collecting VAT from your customers and paying it to Customs and Excise less the VAT you have paid out in the course of business.

Corporation

A corporation is a legal entity separate from the persons that form it. In British tradition it is the term designating a body corporate, where it can be either a corporation sole (an office held by an individual natural person, which is a legal entity separate from that person) or a corporation aggregate (involving more persons). In American and, increasingly, international usage, the term denotes a body corporate formed to conduct business, and this meaning of corporation is discussed in the remaining part of this entry (the limited company in British usage).

Corporations exist as a product of corporate law, and their rules balance the interests of the shareholders that invest their capital and the employees who contribute their labor. People work together in corporations to produce value and generate income. In modern times, corporations have become an increasingly dominant part of economic life. People rely on corporations for employment, for their goods and services, for the value of the pensions, for economic growth and social development.

The defining feature of a corporation is its legal independence from the people who create it. If a corporation fails, shareholders only stand to lose their investment, and employees will lose their jobs, but neither will be liable for debts that remain owing to the corporation's creditors. This rule is called limited liability, and it is why the names of corporations in the UK end with "Ltd." (or some variant like "Inc." and "plc").

Despite not being natural persons, corporations are recognized by the law to have rights and responsibilities like actual people. Corporations can exercise human rights against real individuals and the state, and they may be responsible for human rights violations. Just as they are "born" into existence through its members obtaining a certificate of incorporation, they can "die" when they lose money into insolvency. Corporations can even be convicted of criminal offences, such as fraud and manslaughter. Five common characteristics of the modern corporation, according to Harvard University Professors Hansmann and Kraakman are...

  • delegated management, in other words, control of the company placed in the hands of a board of directors

  • limited liability of the shareholders (so that when the company is insolvent, they only owe the money that they subscribed for in shares)

  • investor ownership, which Hansmann and Kraakman take to mean, ownership by shareholders.

  • separate legal personality of the corporation (the right to sue and be sued in its own name)

  • transferrable shares (usually on a listed exchange, such as the London Stock Exchange, New York Stock Exchange or Euronext in Paris).

Ownership of a corporation is complicated by increasing social and economic interdependence, as different stakeholders compete to have a say in corporate affairs. In most developed countries excluding the English speaking world, company boards have representatives of both shareholders and employees to "codetermine" company strategy. Calls for increasing corporate social responsibility are made by consumer, environmental and human rights activists, and this has led to larger corporations drawing up codes of conduct. In Australia, Canada, the United Kingdom and the United States, corporate law has not yet stepped into that field, and its building blocks remain the study of corporate governance and corporate finance.

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