The term “sole trader” refers to a self-employed person who runs their business independently rather than via an established business structure like a limited company or partnership. The advantages and disadvantages of operating as a sole owner are discussed in this blog post. To be a single trader means that a person and their business organization are legally the same.
It implies that the business owner is personally accountable for all of the company’s obligations. While a sole trader owns and operates the firm independently, this does not imply that they must work solely; they may hire employees on a permanent or part-time basis, just like any other commercial organization.
Sole Trader Advantages and Disadvantages
The Advantages of Being a Sole trader
Suppose you choose to do business as a single proprietor. In that case, you will not be required to deal with the paperwork and procedures associated with founding a limited company or a partnership. You may begin conducting business right now without even selecting a company name or opening a business bank account.
2. The formation of a Sole leadership is free
Starting a firm as a sole proprietor has no legal costs. Although the cost of forming a limited business is low, there is no expense to the beginning as a single trader.
3. Less administrative and reporting requirements
As a sole trader, you are not required to produce annual business reports or submit yearly filings to Companies House, such as confirmation statements or annual accounts. Each year, the only documentation that must provide is the Self-Assessment tax return.
When opposed to limited businesses, sole traders enjoy far greater privacy in their commercial operations. There is no need to advertise an office location or offer information about persons who have considerable influence over the firm.
Financial information is not made public and usually is only required to complete the yearly Self-Assessment tax return.
5. There are no director responsibilities
Sole traders are exempt from the restrictions of the Companies Act 2006. They are exempt from Chapter 2 of the Companies Act, which stipulates the general obligations of directors, such as the need to use reasonable care, skill, and diligence.
Because Sole traders are not required to consider any shareholders, their activities are unregulated, and they are freer to take financial risks. In contrast, if a corporate director takes a high-risk business move, they may be violating their directors’ duty under the law.
If they desire to use an official business structure, Sole traders may change to a limited company relatively cheaply and fast (see below). There is no paperwork required in shutting a sole trader firm, but closing a limited corporation is more complicated.
The Disadvantages of Being a Sole Trader
1. Personal responsibility
Sole traders are individually accountable for their company’s obligations. In contrast to a limited company’s owner (shareholder), a sole trader’s responsibility is unlimited if the firm runs into financial difficulties. If there is insufficient money in the firm, all obligations owing to creditors must pay out of personal assets.
It may extend to their property, including their own house, and can lead to personal bankruptcy. The general liability of being a sole trader might pose a significant danger to someone with substantial personal assets. It may also deter risk-averse entrepreneurs from expanding their businesses.
2. Marketing and trustworthiness
Because solo traders are frequently seen as a more significant risk, some individuals choose to deal through limited businesses. This view may be due to a sole trader’s unregistered status, while established and large enterprises typically deal as limited corporations.
People trust ‘big business’ in commercial transactions because it is assumed that they have the resources, infrastructure, and preparedness to supply the highest quality products or services most efficiently; provide reliable safeguards, and rectify any problems or mistakes. Indeed, this issue is exacerbated in the business-to-business sector, where most huge corporations exclusively engage with other established businesses.
3. Capital raising
It might be difficult for Sole traders to obtain cash. Because they are not required to file yearly accounts, their ability to get bank secured loans may hamper. Potential investors may be turned off if they are not provided shares (a financial interest) in the company.
Even if a sole proprietor is doing very well, they cannot raise significant funds, for example, by encouraging other parties to participate and become shareholders in the firm.
4. Tax effectiveness
Every year, Sole traders must pay personal tax on their whole earnings. They cannot re-invest earnings in the firm via retained profits, as a limited company may; therefore, single traders are not eligible for reduced Corporation Tax rates. Furthermore, since sole traders do not have the option of paying themselves via a mix of salary and dividends, they do not benefit from the tax credit advantages offered to shareholders of a limited business.
5. Business ownership transfer by sale or succession
A limited corporation is simpler to transfer ownership of than an unregistered business. Because the sole individual trader is the business, sole trader enterprises cannot be effortlessly transferred to another party or a successor.
Limited company ownership (which includes customers, inventory, equipment, and facilities) may be readily sold or passed on to family members via the transfer of shares. When a sole proprietor dies, their company dies with them. A limited corporation will continue to operate as long as one director and one shareholder exist.
6. Defending your company’s name
A sole trader’s business name has little protection since anybody may create a company and trade under the same name. The only protection available to an unregistered business is the law of ‘passing off,’ which is convoluted and sometimes insufficient, i.e., it is difficult to establish that someone is attempting to take your goodwill.
We have discussed the advantages and disadvantages of running a business as a sole proprietor and the steps necessary to operate as a limited liability corporation. As far as selections go, this is an important one, so take your time and thoroughly explore your alternatives to choose which company structure is best for you.