Taking a solo route as a sole trader is one of the widely chosen business structures in the UK. According to HMRC, a significant proportion of small businesses operate as sole traders because of the ease and simplicity of the setup process and the unlimited control it offers. However, like any business model, sole tradership is also not without its upsides and downsides. Accordingly, this guide brings to light what are the advantages and disadvantages of being a sole trader and how they can impact business operations, taxation, and financial management.
Take a quick look at the sole trader:
A sole trader is a self-employed individual who independently runs and entirely owns a business.
A sole tradership is also referred to as sole proprietorship. Legally, there is no distinction between the owner and business (e.g., the business and its owner are one and the same in legal standing).
Although sole traders autonomously deal with all business decisions, finances, and legal obligations, they do not stand as a separate legal identity from their business, meaning they bear the burden of unlimited liability. To clarify, sole traders are personally liable for all debts and obligations if the business ends up being a financial disaster.
Furthermore, it is straightforward for a sole trader to register with HMRC, and their profits are taxed as personal income. Consequently, in line with HMRC requirements, sole traders must register for Self-Assessment to file an annual tax return if their business earnings exceed £1,000 per tax year.
Typically, in the UK, sole traders operate as small shop owners and retailers, freelancers (like photographers, writers, and designers), and tradespeople, including electricians, plumbers, and decorators.
A sole trader is necessarily a self-employed individual, whereas a self-employed individual cannot always be a sole trader. How?
Read our guide to find out the difference between the two:
What is the difference between sole trader and self-employed?
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What are advantages and disadvantages of being a sole trader?
The following features distinguish between the advantages and disadvantages of being a sole trader:
Advantages:
Let’s first evaluate the perks among the advantages and disadvantages of being a sole trader to help you decide why it can be a favourable option for you.
Be your own boss:
Being a traditional employee is not everyone’s cup of tea, nor does everyone like to take dictations from their bosses. Fortunately, the business structure of sole tradership perfectly caters to such preferences.
It empowers you to be your own boss, work for yourself, and earn as much as you want, with the setting and schedule suiting your convenience. In short, you set your own work rules and act upon them of your own accord.
Moreover, by deciding your working hours, you free yourself from the time constraints that come with conventional employment. You can pick up the projects you believe you can deliver your best and discard the ones that offer little financial and growth prospects.
Infinite autonomy and control:
The prime upside when considering the advantages and disadvantages of being a sole trader is that the business is yours in entirety to run and do as you deem fit. If you want to implement any change, you can outright go for it without having the need to consult with anyone else.
In addition, while operating as a sole trader, you will exercise absolute, undisputed, and complete command over your business. From managing routine operations to strategising dire matters, you have unlimited access and authority to steer every aspect of your business in whichever direction you want without relying on any external input.
Ultimately, this infinite autonomy ensures your business vision remains unchanged and continues unhindered by boardroom meetings or shareholder viewpoints, unlike a limited company.
Speaking of a limited company, it is often seen that entrepreneurs often find themselves entangled in a fix while deciding between a limited company and sole tradership.
However, it is important to gain clarity about which is a stable, tax-efficient, and secure business structure in the context of registration, taxation, and financial rewards. Thus, read our following guide that comprehensively compares the two business models:
Learn the difference between sole trader and limited company.
Flexibility and versatility:
Flexibility is another considerable benefit of sole tradership. For greater clarity, you can easily evolve and adapt your business in tandem with changing dynamics or circumstances. Whether you want to expand your foothold, diversify, or make any alterations to your business, there are no restrictions, confines, or complexity of business structure for any change you want to bring about.
Retain all business profits:
If you are indisposed to part with your business profits or someone to whom the idea of sharing profits does not appeal, sole proprietorship is your best choice for a business model.
Whatever profits or earnings your business generates, it is all yours and yours alone to keep after all the tax obligations have been accounted for. Therefore, such a business can bring more benefits than employment.
Further elaborating, a limited company’s profits are subject to corporation tax and dividend tax. It signifies that an individual will have to file a self-assessment for their dividends (that come under their personal account) and simultaneously pay corporation tax on the company profits ( on the company’s business account).
On the contrary, sole traders pay only income tax on profits and can effectively retain all their post-tax earnings. As an outcome, for businesses with lower revenue, it proves to be tremendously beneficial.
Simpler taxation process:
Being a sole trader comes with the perk of tax efficiency as well. To go into detail, the tax liability for a sole trader is far more manageable than running an LLC since you will pay income tax annually by filing the self-assessment tax return without the need for formal company-style accounts.
For instance, since your business does not require separate registration, you do not need to pay corporation tax or spend a significant amount of time preparing your annual tax return.
Being specific, sole traders pay income tax on their profits rather than Corporation Tax. For the current tax year, which is from 6 April 2024 to 5 April 2025, the following income tax rates are applicable for the sole traders:
| Tax Band | Tax Rate (%) | Taxable Income |
| Personal Allowance | 0 | Up to £12,570 |
| Basic Rate | 20 | £12,571 to £50,270 |
| Higher Rate | 40 | £50,271 to £125,140 |
| Additional Rate | 45 | over £125,140 |
To keep pace with the income tax rates, keep visiting the government website often.
In addition, sole traders also have Class 2 NICs and Class 4 NICs to fulfil. While Class 2 NICs are considered paid, Class 4 contributions are mandatory.
For tax year 2024 to 2025, Class 4 NICs rates are:
6% on profits of £12,570 up to £50,270
2% on profits over £50,270
To know more about the rates, go to the government website.
Get in touch with our young, clever, and tech-driven professionals if you want to choose the solution to tax burden or accounting problems in the UK for your income. We will ensure to offer the best services.
Simple compliance and low-cost setup:
The minimal cost of set-up is yet another considerable benefit you should focus on when evaluating the advantages and disadvantages of being a sole trader. Usually, in order to incorporate a limited company, registration with the Companies House is mandatory. To your relief, there is no such legal requirement if you are operating as a sole trader, such as:
- You are not required to register with the Companies House;
- Accordingly, you do not need to pay incorporation fees;
- No need to maintain complicated administrative records.
- Likewise, registering yourself with HMRC as a sole trader for filing self-assessment is free of any cost and can viably be done online in just a matter of minutes.
- More importantly, unlike corporations or partnerships, sole traders face fewer regulatory filings and compliance checks.
On the whole, starting as a sole trader is unmistakably forthright and uncomplicated. With fewer administrative hindrances in contrast with other business models and minimal set-up costs, it becomes an excellent option for the entrepreneurs keen on materialising their ideas and aspirations into an active, operating business.
Minimal paperwork and reduced administration:
One of the underrated yet undeniable upsides of taking the solo route is the reduced paperwork and administration. Operating as a sole trader highlights the crucial fact that you will have to deal with considerably less paperwork than is involved when you own a limited company.
As previously discussed, there are fewer paperwork requirements involved as you and your business are the same legal entity.
Consequently, you are not obligated to maintain statutory registries, give details about the individuals expressing interest in your business, or submit applications for confirmation. In essence, not only does this save your time, but it also alleviates your stress on managing bureaucratic obstacles.
Greater privacy and confidentiality:
Whether the details or information pertaining to the business’s crucial matters will be disclosed falls under the confidentiality of a business, which is imperative for any owner without an ounce of doubt.
Not every business owner would like to bring their matters into the public eye, for privacy is important for them. In this regard, sole traders have another upper hand since they have more privacy in the context of needing to publicly disclose their registered office address, financial statements, details of business owners, or annual accounts via Companies House.
Explaining further, you will only share information about the business while filing for the self-assessment tax return, which only HMRC can view.
To sum up, sole traders can effectively maintain greater privacy and confidentiality over their business affairs. It is a particularly appealing aspect for those who prefer keeping their financial matters private and exclusive.
Easy to switch business structure:
Once you have successfully surmounted the initial ups and downs of the business, it is likely to thrive over time, so much so that, at a point, it will become an established one.
It is not uncommon for you to consider the possibility of expanding your business, like transitioning to a limited company at a later stage. Luckily, another edge among the advantages and disadvantages of being a sole trader is the always-available option to switch to another business structure with consummate ease and flexibility.
Therefore, this flexibility enables business owners to test their business model before they finally decide to commit to a more complex structure.
Get in touch with our young, clever, and tech-driven professionals if you want to choose the solution to tax burden or accounting problems in the UK for your income. We will ensure to offer the best services.
Disadvantages:
After running the advantages, it is time to go through the cons of being a sole trader because only after carefully comparing the advantages and disadvantages of being a sole trader can you truly reach a decisive decision:
Unlimited personal liability:
The biggest drawback of being a sole trader is the associated personal liability for all business debts and legal obligations. Since there is no legal distinction or separation between personal and business finances, in case your business ends up wreaking financial havoc, you will have to part with your personal assets. Let’s delve a little deeper into understanding it.
Being sole means you exclusively bear the personal responsibility for all business debts and liabilities. Opposed to a limited company’s shareholders, who benefit from limited liability protection, your liability is unlimited.
In addition, any debts your business owes to creditors will then be paid through your personal assets if there are inadequate assets in the business. More importantly, your liability will even extend to your personal finances, such as a home or car, which can lead you to insolvency.
In conclusion, walking down the solo path is definitely not recommended for you if you own extensive personal assets. Similarly, it may deter or discourage risk-averse entrepreneurs from expanding their businesses.
Limited access to capital raising:
Difficulty in capital raising is a significant drawback you must consider when assessing the advantages and disadvantages of being a sole trader. Business reputation or credibility comes with a formal or recognised business structure since, without that being in place, lenders might be reluctant to offer loans or funds for your business.
Likewise, since the submission of annual accounts is not a legal requirement for you, it reduces your business transparency, which in turn inhibits your ability to secure bank loans.
In a similar manner, since you cannot offer any financial stake, such as shares, to any potential investor interested in pouring capital into your business, it will be a major put-off or loss of interest for them.
Subsequently, securing capital will be a laborious feat. It is because your business structure disallows you to raise necessary capital by inviting third parties to make investments and become shareholders in the business, even if you are progressing by leaps and bounds.
Higher personal tax rates compared to corporation tax:
The profits or earnings a sole trader generates through business are subject to income tax on the full extent of their profits every year. Now, it is worth highlighting here that a limited company’s profits are subject to lower rates of corporation tax.
Furthermore, withdrawing income as a combination of salary and dividends is a tax-efficient way for company shareholders/owners, which the sole traders are devoid of.
To strengthen the argument, as shown in the table, the income tax rate can even surge up to 45% if the income exceeds the £125,140, which is not a tax-convenient option. On the contrary, the corporation tax rates for a limited company range from 19% to 25%.
Hence, while the sole traders are only liable to pay income tax, and not corporation and dividends tax, the income tax rates will not be always advantageous for you once your business starts producing profits beyond £125,140.
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Entire responsibility for all business functions:
Bearing sole responsibility for all business operations is yet another stumbling block you cannot overlook when going through the advantages and disadvantages of being a sole trader.
Being the sole authority in the business, you are responsible for all aspects of the business, including administration, customer service, and marketing. Undeniably, it can sometimes become excessively overwhelming and nerve-wracking, especially as the business is on an upward trajectory.
Difficulties in selling the business:
While it is easier for a sole trader to transition their business into a limited company, selling the business can be a challenging and taxing task. To do so, you will first have to switch to the limited company structure, which would certainly mean business expansion.
It is noteworthy that if you do not want to expand the business, selling it would be more difficult than selling a limited company. It is because limited companies have structured ownership and shareholding systems, which makes it easier to transfer ownership.
Long-term sustainability:
Another snag of being a sole trader is that your business survival remains uncertain. Since you pursue this cause out of your sheer motivation, enthusiasm, skills, and business acumen, your business’s longevity and continuity remain heavily reliant on your own passion and individual well-being.
You may lose your passion over time, your enthusiasm might start to ebb or fade if the business does not go as you anticipated, what if you fall ill or incapacitated to run the business, and, let’s not forget that motivation is not ever-present. Considering these factors, it will not be an overstatement to say that your business stability and survival will always be at risk.
Conclusion:
To conclude, an individual choosing to operate as a sole trader in the UK must evaluate the advantages and disadvantages of being a sole trader to decide if it’s a venture worth undertaking. While it offers simplicity, lower costs, and immense autonomy and control for freelancers, consultants, and small business owners, it is also laden with risks, including unlimited personal liability and limited access to investment.
Further, for self-employed individuals undecided about whether to operate as a sole trader or turn to some other option, such as incorporating a limited company, it is essential for them to seek professional advice.
In this connection, Accountingfirms connects sole traders and business owners with experienced accountants who are registered with us to provide you guidance on taxation, business structure, and compliance with HMRC.
Therefore, whether you need help with registering as a sole trader, filing tax returns, keeping accurate records or managing business finances, the certified and skilled accountants at Accountingfirms can help you eliminate the financial hindrances so you can tread down your self-employment road effectively.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.