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. You can register as a sole trader business for free on our website.
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!
35 comments on “Advantages and Disadvantages of a Sole Trader”
this is a great website helping me with my work and understanding of a sole trader. thank you, though i think there should be more infomation and also some disadvantages.
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Hi Drew,
Is there anything specific I could help you with?
Thanks
Peter
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ive heard that you can be employed by another company and also be a soletrader at the same time so as to test the waters before going for the big leap on your own is this true? I would expect you would have to let hmrc no you are doing this so as not to drop yourself in the peverbial?
ive heard that you can be employed by another company and also be a soletrader at the same time so as to test the waters before going for the big leap on your own is this true? I would expect you would have inform hmrc you are doing this so as not to drop yourself in the peverbial?
Yes, it is very common for people to be employed full time and to freelance or start a business in their spare time. By registering as a sole trader you are letting HMRC know that you will be earning money yourself (self-employed). They will send you a self assessment tax return at the end of the year. On this you declare the income from your job and anything you have earned yourself. As long as you declare all of your income on this (and pay the appropriate tax) HMRC should be happy.
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I am full time employed with two jobs. Gets paid after the tax have been deducted. Thinking of starting an online business(sole trader).At the end of the financial year when HMRC sent a self assessment tax return form , i just need to provide the details of the income that i have earned from my business right? Or should i give the details of my gross or net income from my two employed job as well??
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I found the article above to be very helpful. I was just wondering if you know where i could find the tax associated with being a sole trader and any tax exemptions associated with it. Thanks
Hi,
The money you make as a sole trader is basically treated as your personal income and is taxed at the same rate as wages from any other job. However only the profit is taxed in this way so any costs you pay out (tools, equipment, stock etc.) will reduce the amount of profit and therefore the amount of tax. There can also be exemptions for some sole traders but you would need to discuss how these work with your particular business with an accountant. If you give us a call on 01245 492777 we can set this up for you.
Thanks
Peter
Hi, I have currently a small outlet selling gifts as a sole trader, and have now recently opened a small coffee shop, elsewhere nearby, would you advise as to how to go forward with this either continuing as an extention of my sole trade business or run new business with my partner as a partnership?? many thanks
David
Hi David,
This really depends on how much money is involved. As you start yo earn more money it makes more sense to form a limited company as you will pay less tax. When you form the limited company you will also be able to formally set out who owns what between you and your partner and have a written agreement. Plus a limited company means that if the business goes under your personal property and money is not at risk. As a limited liability partnership you would also get some structure in terms of dividing the business and protecting personal assets but the tax you pay would be basically the same as if you are a sole trader.
If you want to give us a call on 01245 492777 we can discuss the best options for you in more depth.
Thanks
Peter
in the case of sole tradership the person is liable of all debts and liabilities
it helped me so much with school projects
Hi peter im currently working and selling charcol that need to be registered and they will consider my application as sole trader? Thx
Hi Senzo,
If you are working and have an extra income from a side business then you should register as a sole trader.
Thanks
Peter
hi peter,
what business structure is best to choose, a sole trader or a partnership? please help me in making decisions.