Sole traders are the simplest business structure in the UK. They are individuals who own and operate a business on their own, without any partners. Sole traders have complete control over their businesses, but they also assume all of the risks and responsibilities. This can be both an advantage and a disadvantage, depending on the individual’s circumstances. It is important to understand sole trader’s advantages and disadvantages before opting for this business structure.
Advantages Of Starting A Business As A Sole Trader
There are several advantages to starting a business as a sole trader. and we have listed a few below.
Complete Control Over Your Business
Perhaps the most obvious is that you have complete control over your business. You make all the decisions, and you are responsible for all outcomes. This can be both good and bad: it means you have maximum flexibility, but also maximum responsibility.
Most Simple Business Structure
Another benefit is that setting up and running a business as a single trader is rather simple and cheap. There are no complicated legal or financial procedures to follow, and start-up costs are insignificant. Moreover, you can immediately start trading once you have registered as a sole trader.
No Partnership Issues
If you have any problems or disputes with partners, these will not affect your business as a sole trader. You are in complete control, and any disagreements will be between you and the partner(s).
Keep All The Profits
A sole trader’s earnings are taxed only once, at the personal level. You keep all of the gains after tax on your business as a sole trader. You would have to share these if you formed a partnership. If you establish a limited company, you must distribute any profits to any investors/shareholders.
Tax Advantages
As a self-employed individual, you can enjoy certain tax advantages which are not available to employees. For example, you can claim back a proportion of your home expenses as a business expense.
Complete Business Privacy
A limited company must register with Companies House and submit the information that becomes a public record. The owner of a limited company will have to provide business information as well as directors’ and shareholders’ information. This raises the visibility of your firm. You don’t need to register your firm with Companies House as a sole trader, allowing you greater privacy for your business.
Flexibility To Change In Future
It’s simple to transform your company into whatever structure you choose. If you wish to start small and grow gradually, being a sole trader allows this. You may quickly change your company’s form. If the income of your firm begins to rise, for example, you may find it more advantageous to establish it as a limited liability corporation instead of continuing as a sole trader. You can do this in a matter of minutes. It’s not difficult, so you may keep an open mind about future possibilities.
Disadvantages Of Starting A Business As A Sole Trader
Of course, there are also some disadvantages to starting your business as a sole trader. and It is important to read more about the disadvantages of being a Sole Trader before making any decisions.
Unlimited Liability
If you start as a sole trader, it will be regarded as a single entity. As a result, you are exposed to unlimited responsibility for your firm. A limited liability firm and its owner, on the other hand, are seen as two separate individuals. but as the sole trader and their business are considered one and the same, the owner will be liable for any debts or legal actions the company may incur.
More Difficult To Raise Finance
It can be more difficult to raise finance as a sole trader as potential investors may view you as a higher risk. Banks are also less likely to offer loans to sole traders. This is because a limited company has shareholders who can be held responsible if the business fails.
No Separate Legal Entity
As a sole trader, you are not recognised as a separate legal entity. This means that you cannot enter into contracts in your own name; all contracts must be made in the name of your business. If you were to enter into a contract with another party, and your business subsequently went bankrupt, they could sue you personally to recover any money they lost.
Tax May Not Be Efficient
Limited companies are generally considered to be more tax-efficient than sole traders. A limited company director has greater leeway to avoid taxes and increase profits. A single trader, on the other hand, has less freedom to work around the tax system. A sole trader’s personal allowance is £12,570 (2022/23), after which they must pay tax on any additional income at the following rates: