Sole Proprietor

A sole proprietor (also referred to interchangeably as a sole trader) is someone who runs their own business as a self-employed person. Common examples include an electrician or plumber. At the start of 2021, it is estimated that the UK private sector business population comprised 3.2 million sole proprietorships (56% of the total)[1].

Getting started

In terms of setting up as a sole proprietor, the process is relatively quick and easy, with no formal steps required to establish the business. Note, however, that a sole proprietor operating in the UK must be registered with HM Revenue and Customs (HMRC) for value added tax (VAT) and other tax purposes. The business may also be subject to certain licensing and regulatory requirements, depending on the nature of the business activity to be carried out.

The vast majority of UK private sector businesses operate with no employees. Where there are employees, however, the business will still be classified as a sole proprietorship if the business is owned by a single individual.

Typically, a sole proprietor earns their income from the money the business receives from its customers or clients. The sole proprietor is required to pay income tax on their earnings as a self-employed person.

No separate legal identity

A sole proprietor is personally liable for the debts of the business. As a matter of English law, the business has no separate legal status of its own. This means that the sole proprietor’s assets - both their business and personal assets - are treated as one and the same. If the business fails, it is not just the individual’s business assets (e.g., stock and premises), but also their personal possessions (e.g., any savings, their house and car), which may be taken or sold to repay the outstanding debts of the business.

Ultimately, if the sole proprietor is unable to pay off all the debts using their business and personal assets, they may be made bankrupt. This is known as unlimited liability.

When the sole trader retires or dies, the business ceases, although the business or individual assets may be sold if one or more buyers can be found.

Summary

Therefore, a sole proprietor is a person who alone:

(a) has the right to make all decisions affecting the business

(b) owns the assets of the business

(c) is responsible for paying income tax on all the profits of the business

(d) has unlimited liability for the debts of the business

[1] “Business population estimates for the UK and regions 2021: statistical release.” Published 7 October 2021 by the Department for Business, Energy & Industrial Strategy.