Being a sole trader: what are the advantages?

A sole trader is also a sole entrepreneur or proprietor who owns his business and does with it whatever he chooses. He is the sole decision-maker and holds the sole control over the affairs of his company.

As a sole trader, you and your business are seen as a single legal entity. This is good unless there’s a big loss, debt, or lawsuit coming your way. Then it is a disadvantage because you will bear such a burden alone.

But is it really worth registering as a sole trader?

When you consider the administrative efforts required to register as a limited liability company, you’ll realize it may be worth it to register as a sole trader. For one, it costs nothing to register with HMRC, and accounting and tax payments are likely to be less costly and stressful than that of a limited company. It also makes you qualify for the benefits of voluntary Class 2 National Insurance.

Being a sole trader or self-employed individual is especially advantageous for start-up businesses and small companies as the required costs to start are minimal compared to other types of company set-ups.

Now let’s get into the deep waters…

What are the real advantages?

Some of the advantages of being a sole trader are-

• No profits sharing – the first obvious advantage is that you get to keep all your profits to yourself after you must have paid tax. Since nobody owns shares with you or stands as a guarantor of your business, every profit made from the business is yours to do with as you deem fit. Every asset belonging to your company is also entirely yours.
   
• Easy setup and obligations – starting as a sole trader is easier than otherwise. In other types of business or company formations, there are a whole lot of processes and resources required for their incorporation. Whereas, as a sole trader, you can begin your business whenever you want and register with HMRC only when you have begun to make over £1000 per annum. You can do this online by registering for self-assessment. This will enable you to pay tax and also set up PAYE if you are employing people to work for you.
   
• Reduced start-up costs – with as little amount as you have, you can become self-employed. You don’t have to have so much to begin selling your goods or services since registration with HMRC is free and you may not even register at all if you are making less than the required threshold.
   
• Reduced overhead costs – as a sole trader, you can outsource a lot of what you do and pay less than if you are hiring people to work permanently. As such, you can reduce labour costs and only keep a few fixed overheads.
   
• No shared control – since a sole trader does not have a board of directors, shareholders, or guarantors to report to, you have sole control of the decision-making in your company. This makes for a quicker response to crises and or customers’ needs.
   
• Financial privacy – the limited liability companies usually have their financial information available on the Companies House database. Since you don’t need to register with Companies House, your information is safe and not accessible to competitors.
   
• Flexibility to change the business structure – you can change your business structure from sole trading to any other type when your company is in the best financial state for it. Whereas, other business types cannot easily make the transition without so much stress and paperwork.
   
• Easier accounting – even though you may wish to involve an accountant to help make your account records balance out, it is very possible to do the accounts yourself without external help. Even with the help of an accountant, there is still less to do than if you are a limited company.
   
• Reduced taxation – your tax responsibilities are considerably reduced if you are a sole trader because you only pay self-assessment tax returns (and VAT if your taxable returns are more than £85,000). Whereas, a limited liability company has to pay corporation tax and submit its account records annually to the Companies House.
   
• Personalization of services rendered – this is most especially useful if your clients are within a locality. Being a sole trader enables you to render services to your clients in a more personalized manner that gives you and your business credence.