Sole trader advantages and disadvantages often confuse many newbies or fledgling business executives who are struggling to initiate their entrepreneurship journey. Therefore, if you are also looking at the options to step into the business ventures, you might have come across different options of being a sole trader, partnership or a private limited company.
If you want to be your own boss, then being a sole trader is the best option. However, being a sole trader is beyond that freedom and you need to consider many advantages and disadvantages of a sole trader in the United Kingdom. This is why we will discuss what a sole trader is and what are the key advantages and disadvantages of being a sole trader. So, let’s start our interesting and exciting discussion!
What is a Sole Trader?
A sole trader is a person who is starting his business enterprise without having a partnership shared with anyone and is self-employed to manage his business operations and activities. As a sole trader, the person himself is liable to pay off all the debts if the business fails.
Being a sole trader, you enjoy the complete freedom of making key decisions and you have complete ownership of your business. Moreover, no registration fee is required for a sole trader and he enjoys all the profits, paying taxes on this income earned as profits.
However, a sole trader has to register for self-assessment to manage his taxes returns and liabilities. Similarly, he has to make a Class 2 National Insurance Contribution regardless of the profit or loss in the business. Furthermore, if he earns a profit, he needs to pay Class 4 National Insurance Contributions.
Sole Trader Advantages
The advantages of being a sole trader are numerous and you need to consider all of them to take full advantage of this business enterprise kind.
1. Freedom of Decision-Making
As in partnership, you have to depend on others to make a decision. However, you have complete freedom of making key decisions regarding your business.
2. Your Business, Your Rules
If you are a sole trader, you are your own boss and you can set flexible rules for your convenience and you are not accountable to anyone.
3. Complete Profit Retention
A sole trader earns all the profits and he does not need to share them with other shareholders. He can use them as he wishes to expand his business, reinvest or enjoy his income for himself.
4. Convenient Set-Up
The set-up of a business as a sole trader is hassle-free as you don’t have to pay any registration fee and go through a lengthy process of Companies House. Instead, the HMRC requirement is enough to set up a business as a sole trader.
5. Minimum Cost and Effort
As a sole trader, you don’t need to get professional help for establishing your business as it happens in the case of a limited company. So, the costs to entry are low for a sole trader.
6. Maintains Privacy
As a sole trader, you don’t need to share your personal details with Companies House. So, if you love to keep your details private, you can go for a business as a sole trader.
Sole Trader Disadvantages
The attractive advantages of sole traders should not overshadow the importance of looking at the disadvantages. A 360-degree approach can help you reach a more wise decision.
1. Unlimited Liabilities
The unlimited liability for all the debts and business liabilities rests on you. As your business is not a separate entity you are responsible for all the risks of default.
2. Complex Taxation
As a sole trader, the taxation becomes complex due to multiple allowances and taxes simultaneously.
|£0 – £12,570
|£12,571 – £50,270
|£50,271 – £150,000
3. Raising Funds is a Challenge
Due to the poor transparency not submitting annual accounts undermines the financial ability of a business as a sole trader. So, you might get problems with raising funds for your business.
4. Transfer of a Business
You cannot transfer your business as efficiently as a limited company can. This is the reason why your business expands when you give your time and effort. On the other hand, if you leave work, your business dies instantly.
5. No Specific Rights On Your Business Name
Anyone can use the name of your business as your business is not registered with the Companies House. So, getting a unique name for your business can hurt the credibility of your business if someone is also using the same business name.
The Bottom Line
To conclude, we can say that if you like flexibility and independence in decision-making, you can initiate your business as a sole trader. Working as a sole trader helps you achieve freedom and you can retain all the profits yourself, paying no registration fee for the business set up.
Moreover, you should not overlook the cons of working as a sole trader. You are liable to pay all the debts if your business fails to pay all the liabilities and the taxation becomes more ambiguous. So, if you’re going to establish a sole trader enterprise, consider all the sole trader advantages and disadvantages, paying attention to the minutes and niceties before you make a final decision.
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Disclaimer: All the information provided in this article on Sole Trader Advantages and Disadvantages, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.