What are the advantages and disadvantages of a sole trader?

The world of business is so flexible that you can choose to do business alone, be in partnership with a friend or family member, or do business with a group of people that have a common interest with you. In any way you choose to do business, the bottom line is profit and your clients being satisfied. 

There are advantages and disadvantages to each structure, so you’ll be the one to weigh your options and choose the one that suits you best.

In this article, we will be delving into the advantages and disadvantages of doing business alone – sole trader or sole proprietorship. But, before that, who is a sole trader? 

A sole trader is a self-employed individual whose business is seen as the same entity as its owner. 

He is the don of his business. He gets to keep all profits after tax and also bears every liability of the business alone. This form of business structure is best suited to entrepreneurs, freelancers, small businesses, and start-ups.

What are the advantages of being a sole trader?

Below is a list of some of the pros of setting up as a sole trader.

• Full control of your business and flexibility – a sole trader does not answer to any board of directors but himself and hence has all the control there is to have over his business. This allows for quick decision-making to respond to a client’s need or crisis. Also, since you are the don of your business, you can choose to work and take a holiday at any time you want. 
   
• Easy setup and obligations – setting up as a sole trader is easy. You can choose to not register to pay tax with HMRC until you have started earning up to £1000 or you want to set up PAYE if you want to employ others to work with you, register for tax-free childcare or voluntary Class 2 National Insurance Scheme. Even when you are ready to register, you only need to register for Self-assessment which can easily be done online via the HMRC website. No long paperwork or process. 
   
• No profits sharing – since the business is all yours, all the profits garnered from the business are all yours after tax payment. You can choose to spend it or roll it back into the business. The choice is all yours.
   
• Low start-up and overhead costs – a sole trader can start selling his services without any initial capital, for example, a handyman, graphics designer, etc. Just needs his tools to start. Even if you choose to register before starting business, registration is free with HMRC and there are benefits to registering such as tax-free child care, etc. Also, as a sole trader, you don’t have to keep anybody on a long-term payroll as jobs can be contracted out except for the important ones. So, you don’t have to be paying someone whose job is occasional or seasonal consistently. You call them when you need them. That saves you money. 
   
• 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 down the line – as your business grows, you can choose to join forces with others by partnership or becoming a limited company. This is easier to do as a sole trader than in any other form of business structure.
   
• Easier and cheaper accounting – accounting for a sole trader is easier, straightforward, and cheaper. You can do your accounting by yourself without involving an accountant.
   
• Reduced taxation – if your business is earning less than £25,000 per annum, you pay less tax and you don’t have to register for VAT until you are earning more than £85,000 per annum. 
   
• Personalization of services rendered – you can give credibility to your business by making each service to each client unique. This distinguishes you from others in your locality. 
   
• Fewer statutory requirements – you do not have to file an account record or confirmatory statement yearly with Companies House, you are not registered with them anyway. Your only statutory requirement is filing a tax return with HMRC at the end of the tax year.

What are the disadvantages of being a sole trader?

• Unlimited liability – a sole trader bears all the liabilities of the business since the business is seen as the same entity as him and his assets are fair game in a lawsuit.
   
• Account reconciliation – if you happen to be using a personal account for your business as well, without proper documentation, it becomes more difficult to balance your account books. This will result in difficulty in proper tax filing.
   
• Marketing and credibility – the cost of marketing is higher for a sole trader. Also, the business may not be creditworthy for a loan or attracting investors, hence it becomes harder to raise capital.
   
• Tax efficiency – for a business earning higher than £25,000 per year, it is not tax-efficient to still be operating as a sole trader because you’ll pay more than if you were a limited company.
   
• Transfer of business ownership by sale or succession – most often, unless the business is transferred or taken over by a close relative, the business could go into extinction once the proprietor dies.
   
• Business name protection – if you are an unregistered business, your business name is fair game to anybody who registers first. This is because whoever registers first is who is legally recognised by the law.
   
• Less attractive to clients – small businesses are less attractive or trusted by potential clients since they could go into extinction at any time. As such, clients are wary of doing business with them, investors are doubtful of getting returns on their investments, and financial organisations are reluctant to give loans in case of insolvency.
   
• Harder to take breaks – since you are the owner and the only one responsible for running the business, it becomes more difficult to take a sick day, vacation, or even holiday for fear of losing out on profits.