Advantages and Disadvantages of Sole Trader

Are you employed in the UK and wish to start a business? Launching a new business can be an uphill task, but proper information on how to do it makes it a walk in the park.

You can bid your day job goodbye and start working as a sole trader.

Before starting a business, knowing the appropriate business structure for you is essential. In the UK, a sole trader is the most popular business structure. Sole trading is mainly single-owned, but there are so many things you need to know about.

In the UK, the business structure you choose to explore determines many things, including management, operation, and even who is liable for risks when the going gets tough.

Today, we’ll discuss sole trader businesses, how to set them up, and the advantages and disadvantages of the venture.

Who is a Sole Trader?

A sole trader (Sole proprietorship) is a self-employed individual who owns and runs a business. As a sole trader, you control the business, assets, and profits after taxation. As a sole trader, you’re also responsible for legal matters and making all decisions on behalf of the company.

A sole proprietorship offers individuals simplicity and flexibility, which is ideal for freelancers trading in various industries. People from all walks of life can become sole proprietors offering services like writing, designing, decorating, and plumbing.

Sole traders exist in all industries and are the backbone of the UK business community. They contribute highly to the economy by hiring employees and paying taxes.

The Advantages of a Sole Trader

Sole trading businesses are the most popular ventures for small businesses.

Regardless of the service you offer as a sole trader, this business structure has both advantages and disadvantages. Here are the benefits of being a sole trader.

1. Be the Boss

Many people dream of self-employment, and if you're one of them, your dream can come true someday.

Think of not answering to anyone, working on a schedule that you set up, and no boring board meetings to attend.

Since you make all the company decisions, working for yourself is fantastic. But you must be highly disciplined to avoid bringing down your business.

As the boss, you decide when to take on new projects and what to reject, allowing you to attend to other matters.

You can also make changes whenever you deem fit without going through anyone, like shareholders. Essentially, you do as you please since you’re the boss.

2. Keep All Profits After Taxes

As a sole trader, all the profit is yours to keep, but only after paying taxes. When working alone, you can minimise spending to increase profit margins, which you enjoy alone. Moreover, you also get to retain business ownership and assets.

Easy to Set Up

Setting up a sole proprietorship is easy because you don’t have to register with Companies House. Unlike in other business formations, you don’t have to collect multiple documents to meet legal requirements. Instead, you only inform His Majesty’s Royal Customs (HMRC) that you're self-employed and running a sole trading business.

3. Low Entry Costs

Starting a new business is easy and cost-efficient as a small business operator since you don’t have to pay Companies House. Unlike limited companies, sole traders have fewer administrative requirements, making it more appealing for small business owners. Plus, the capital to start and run the business is low, making it a viable option for people with limited resources.

4. Maximum Privacy

Other business structures, like limited companies, are published on the Companies House website, and the information is accessible to the public. As a sole trader, your accounts and personal information are private, and you don’t have to worry about exposure to the general public.

5. Complete Control of the Business

Working for yourself makes you the boss. You have total control over the business and run it as you please. Even when there are decisions to make or changes to implement, there’s no consultation or voting. A sole proprietor develops the business as they see fit.

6. Tax Efficacy

A sole trader can offset business expenses against the trading income. Moreover, a sole trader only pays annual income tax without needing official company-style accounts through the self-assessment system.

Disadvantages of a Sole Trader

Even with the many advantages, sole trading has some downsides you need to know about. Understanding these drawbacks allows you to make informed decisions as you run and grow your business.

1. Unlimited Liability

In the same way, if you enjoy profits alone in a sole proprietorship, you will also be an unlimited liability. , you’re responsible for any debts and losses the business incurs. Thus, any financial pitfalls the business encounters are a bitter pill to swallow, and your assets can be at risk.

2. Possible Credibility Problems

A sole trading business isn’t as prestigious as other formations like a limited company. Given that credibility issues can affect the clients you attract, it’s essential to identify a standard structure with evidence of success before emulating it. Before you choose a business structure, consider your client base.

3. Sole Responsibilities

Having complete control over your business means you run the show. However, you’re responsible for all the wrong decisions you make and accountable for anything that goes south. There’s no way a sole trader can escape these misgivings.

4. Financial Barriers

Generally, lenders are sceptical of lending to individual entities like sole traders. Sometimes, it’s about the business they run, while other times, it’s about the guarantee of payment. As a result, sole traders find it challenging to secure a loan, and if they do, it’s way lower than expected. Not forgetting, the rates might not be favourable, making the entire affair feel like a rip-off.

5. Sale Limitations

Selling a sole trading business or having someone take over isn’t as easy as with a limited company. Since the business and the owner aren’t separate, the situation is complex, and the sole trader must arrange to transfer assets to the new owner.

Form Your Company with Incorpuk Today

At Incorpuk, we will help you file accurate information when you register your company through us. We will help you with incorporation articles, a registered office address, and all you may need to register your company in the UK. Contact our team if you seek any information; we will gladly assist.

The Differences Between a Sole Trader and a Limited Company

The significant difference between a sole trader and a limited liability is the liability accredited to each business structure.

• Sole traders have unlimited liability since the business isn’t a separate legal entity from the owner. The owner is liable for failures and debts in the business.
• As for limited companies, they offer limited liability because the business and its owner are separate legal entities. If there are financial pitfalls like debts and failures, all shareholders share the burden depending on their allocation.
• The paperwork and accounting reports for a sole trader are simple. Hence, starting a business is easy. As for a limited company, incorporating isn’t as straightforward and takes more time. You must register through Companies House.
• Sole traders are in total control of the business, meaning they make all decisions and enjoy the proceeds after taxation. Further, funding sole traders is challenging since a single person owns the business. On the other hand, limited companies are run by directors and shareholders who invest in the business. Profits are shared among them, and they make collective decisions through a vote.
• As a sole trader, you oversee our finances and accounting. You’re expected to pay and file yearly taxes promptly by submitting a self-assessment form every tax year. Thus, you must keep track of all invoices and bank statements and present them to HMRC annually. Failure to meet these requirements can result in fines.

Can I Switch From a Sole Trader to a Limited Company?

You can convert to a limited company in your sole trading business. Most sole traders make this shift after their annual turnover reaches a certain level or wish to expand without risking their assets. Besides registering the company at Companies House, there are other requirements you must meet. Here’s a checklist of things you must do when converting from a sole trader to a limited company.

• Register the limited company at Companies House
• Notify HMRC about the decision to change the business structure
• Change your sole trader business and assets to the limited company
• Open a business bank account in your little company name
• Inform stakeholders of the change in business structure
• Incorporate your limited company for Tax and PAYE

Frequently Asked Questions

What are the main advantages of a sole trader?

A sole trader's main advantages are minimal set-up costs and less paperwork. The business is also easy to maintain and run.

What is the leading business structure in the United Kingdom?

The main business structure in the United Kingdom is a sole trader (sole proprietorship), and it’s not considered a separate legal entity from the owner. Since the business needs less capital, individuals with limited income can start small and grow without strain.

Are there LLCs in the UK?

The equivalent of an LLC in the UK is a Private Limited Company (Ltd). The business structure protects the owners from losing personal assets if the business incurs losses.

The Bottom Line

The thought of owning a business and running the show is exciting, yet a huge step. If you start small and grow into a business, a sole trader is the most suitable business structure to explore. Although all businesses have a margin for risks, knowing the advantages and disadvantages of being a sole trader is essential. Analyse the benefits and drawbacks, decide the business structure that favours you, and go for it.