Sole Trader

A sole trader business has many advantages and disadvantages but is easy to set up and is most favoured by "one man bands" who offer house hold services and are self employed as the sole owner of the business concerned.

The business is classed as a small business or SME as they only have one employee who is the owner of the company.

Example sole trader businesses include electricians, gardeners, plumbers, decorators and plasterers which are all traditional trades and easy for the skilled tradesman to operate. They will mainly work on word of mouth marketing and work for domestic households. There are others who set up a limited company but are regulated under the IR35 legislation. It's also best to seek professional advice before making a decision for your future.

Definition of a Sole Trader

Sole trader or sole proprietor is when a business is owned and controlled by one person who takes all the decisions, responsibility and profits from the business they run.

Sole Trader Advantages

The advantages of being a sole trader are immense not lease because the owner has full control over the business for daily operations as well as how large they wish to grow it. It's easy to set yourself up as you only need to declare to yourself you are going to be a business but also have to inform the Inland Revenue you are self employed within 3 months of starting the business.

A sole trader does not need to complete many of the forms and accounting information that limited companies need to produce although accounts should be developed when preparing for your annual self assessment tax return where you declare your annual profits and tax liability.

As there are no staff on hand the owner also takes all of the profits made by the business and all financial information is kept private (whereas limited companies need to file accounts each year at companies house). You don't need to register a company either and can be known as almost anything and most people have businesses that are "trading as".

Decision making is also fast as it's just the owner who decides where the business is heading and whether or not to undertake any work and where and when they will work. They are generally closer to their customers and offer a more personalised approach and improved customer service as they are the person each customer has contact with.

Accountants generally charge less for company accounts and advice because there is less work to undertake. You just need to complete a profit and loss account rather than a balance sheet and cash flow (although it's worth preparing these last 2 on a regular basis to manage your business).

Sole Trader Disadvantages

The main disadvantage is that you, as the owner of the business, are solely liable for any consequences of business failure or any other liability for example injuring a customer or property damage although these can be mitigated against with public liability insurance.

It may also be quite difficult to get larger jobs not only because large corporations have many staff that can work on tenders and offers but because most organisations won't work with a business that only has a staff of one. It can also be time consuming following up on tenders that ultimately don't come to fruition.

You may also need to think about what would happen if you as the business owner were to become sick or had an accident so you couldn't work. Although critical illness insurance is available some times it doesn't start to pay until after one month and it is unlikely to be at the levels of profits the business is making but it is certainly worth considering.

Tax VAT and Liability

Sole traders still need to properly account for all sales, expenses and profits for any income tax and national insurance liabilities on a yearly basis. The VAT rules still apply if the turnover of the business exceeds the limit set by HMRC.

As mentioned above, a sole trading business has unlimited personal liability rather than the liability forming against a company and their directors. If the business can not pay creditors they may have to sell their own personal assets to meet their demands such as their house.

 

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