What is a sole trader?
A self-employed person can operate via a number of different business structures. Each approach will have its pros and cons. This article focuses on the specific pros and cons of being a sole trader.
The term sole trader is often associated with manual professions. However, a sole trader can be any person who engages in any kind of business without forming a legal entity such as a limited company or partnership. That means there is no legal distinction between the owner and the business. A sole trader can either work alone or run a business with employees.
Advantages and disadvantages of being a sole trader
The biggest advantage of being a sole trader is the simplicity of this structure. On the flip side, you’re not protected by the legal status of a limited liability company and that means that your personal possessions including your home could be on the line if your business fails. But let’s have a look at the full sole trader advantage and disadvantage list.
Advantages of being a sole trader
Let’s start with the positives:
Cheap and easy to set up
All you need to do is inform HMRC of your self-employment. This is easily done via an online self-assessment registration. You can trade either your own name or choose a business name.
Easy to change in the future
If your business takes off or you want to bring partners or investors in, it’s easy to switch to a more appropriate business structure.
You are in control
As a sole trader you have all the autonomy. You decide when and how you work and the way your business is run.
Any profit is your own
Whatever you make is yours. You don’t have to share your profits with shareholders or partners.
Less administration
Sole traders have very little admin other than keeping their financial affairs in order. Being a limited company is a lot more demanding in that regard.
Keeping accounts is straightforward
Everyone in business, including sole traders, needs to keep accurate records of business expenses and sales. However, sole traders only need to submit a self-assessment return once a year. Things might get a little more complicated If your turnover goes above a certain threshold (check with HMRC) because you may have to register for VAT.
A greater degree of privacy
Unlike limited companies, sole traders don’t have to publish information about the key persons in the business or financial accounts in any public domain. You get to keep details of your dealings to yourself.
Disadvantages of being a sole trader
As always there are a few things to bear in mind:
Personal liability
Because there is no legal distinction between you and your business, you’re liable for any debts as well as any costs or compensation that may be awarded in a legal claim against you.
With good planning, you can control your finances and avoid bad debts. However, with regards to legal claims brough against you by unhappy customers or a third party, the best protection is appropriate sole trader liability insurance.
Hard to engage with certain customers
When you operate as a sole trader, you may give the impression that you are too small for certain types of clients. Larger businesses and corporations tend to work with similar business structures.
Fewer options to raise start-up capital
As a sole trader you can’t have investors if your business can’t offer a share in the business. Therefore sole traders options to raise finance are usually limited to loans and these can be expensive to service.
A greater degree of responsibility
You are the sole business owner and as such everything in the business depends on you. Even if you have employees, you still have to make all crucial decisions yourself which can take a toll on your health.
Tax can be higher
There are fewer opportunities for sole traders to minimise tax which is why, if your business takes off, it is advisable to consider a different business structure.
