When thinking about opening your own business, you might well have given some consideration to becoming a sole trader. Sole trader, also known as a sole proprietor is one of the types of business available for use within the UK. It is also one of the most popular, for a number of reasons, including the ease with which a business can be set up using this form. However, there are pitfalls to be aware of.
A sole proprietorship is a business owned one person, who has full control of the business and how it is run. They also own all the assets of the business and any profit that it makes. In the same vein, they are also responsible for all the debts and liabilities the business accrues. A sole trader is expected to register as self employed with HM Revenue & Customs and will be required to submit an annual self assessment, but generally speaking their accounting requirements are less onerous than those of a limited company.
It is a common belief that setting up as a sole trader is the cheapest option for starting a new business. However, with our FREE company formation offer, there isn’t much in it and as you can see from our article on the advantages of a limited company, in most cases it is preferable to set up a limited company, rather than as a sole trader.
Advantages of a sole trader
Sole traders benefit from the following advantages:
- Control - Sole traders maintain full control of their business. Running it how they please without the interference of others.
- Profit retention – Sole traders retain all the profits of their business.
- Private data – Information about sole traders is kept private, unlike that of limited companies which is necessarily made public after registration with Companies House.
- Specialist – Often a small business, sole traders can offer a more personal service with local roots and ties. This can be more appealing to potential customers in the local community.
- Personal – Because there is no need to confer with other decision makers, sole traders can make decisions quickly and act on them swiftly, providing for the needs of their customers.
Disadvantages of a sole trader
Just like any other form of business, being a sole trader can also have its disadvantages.
- Liability – sole traders are not seen as a separate entity by the law. Therefore, they are subject to unlimited liability. This means if the business gets into debt, the business owner is liable. In the worst case, this may mean a person risks their home, personal savings and any other assets they have both in and outside of the business.
- Finance – sole traders often find it difficult to raise finance to fund their business. They may struggle with expansion in the future.
- Reverse economies of scale – sole traders will be unable to take advantage of economies of scale in the same way as limited companies and larger corporations, who can afford to buy in bulk. This might mean that they have to charge higher prices for their products or services in order to cover the costs.
- Decision making – all decisions must be made by the sole trader. There is no room for help by others. So the success or failure of the business rests on one person.
As you can see, there are several advantages and disadvantages to starting up a business as a sole trader. Whether it is the best choice for you is a personal matter and varies depending on the type of business you are looking to start. Whatever you decide, here at The Company Warehouse we offer a number of services to help new businesses thrive. Why not take a look around our website today and see how we can help you get your business off the ground!
- Advantages and Disadvantages of a Limited Company
- Advantages and Disadvantages of Partnership
- Advantages and Disadvantages of a Franchise
- Umbrella Company Vs Own Limited Company