A sole trader business has many advantages and disadvantages. However, it's easy to set up and is most favoured by "one man bands" who offer household services. These tradesmen are self-employed as the sole owner of the business concerned.
The business is classed as a micro-business, 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 who are all traditional trades and easy for a 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 and regulated under IR35 legislation. It's also best to seek professional advice before making a decision for your future.
Definition of a Sole Trader
A sole trader or sole proprietor is a business owned and controlled by one person who takes all the decisions, responsibility and profits from the business they run.
Sole Trader Advantages
Many of the advantages are summed up under the heading "control".
- You have full control over daily and strategic decision making.
- There's far less red tape and regulations than a Limited Company.
- You have no staff to manage or pay.
- Starting your business is quick and easy.
- All financial data is kept private.
- No annual accounts to prepare as sole traders add income and expenses to their tax return.
Here they are in more detail:
The advantages of being a sole trader are immense not least 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. You're legally required to inform the Inland Revenue you are self-employed within three months of starting a business.
Less "Red Tape" and Regulations
A sole trader does not need to complete many of the forms and accounting information that limited companies need to produce. Annual accounts help prepare your annual self-assessment tax return where you declare your annual profits and tax liability.
No Staffing Management Required
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. Limited companies need to file full or abbreviated accounts each year at companies house. You don't need to register a company at all and can trade as any name you desire so long as it doesn't infringe copyright of others. Most people operating in this manner have businesses that have "trading as" after their company name.
Fast Decision Making
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.
Lower Accounting Costs
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 two on a regular basis to manage your business).
Sole Trader Disadvantages
The negative aspects of operating on your own are that everyone else perceives you as "small" which in turn has other consequences.
- You have full personal liability for any debts.
- It may be difficult to bid and accept larger contracts.
- There's no staff to deligate to if you have an accident or fall ill.
- It's difficult to scale a business on your own.
- You can't leverage buying power due to your small size.
- You have to buy-in knowledge and expertise if you don't have it yourself.
Below is more detail about these disadvantages.
Full Financial Liability if Things go Wrong
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 damaging property, although public liability insurance can mitigate these potential issues.
Others Portray You as a Small Company
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.
The Business Stops if You are Unable to Work
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, sometimes it doesn't start to pay until after one month. It's also unlikely to be at the levels of profits the business is making, but it's 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't pay its creditors they may have to sell their personal assets to meet their demands, such as their house.