What is a Sole Trader and what are the Advantages and Disadvantages of Being a Sole Trader?
Trying to decide if becoming a sole trader is the right move for you and your business? Well lucky for you, you have come to the right place. This blog will discuss exactly what a sole trader is and the advantages and disadvantages of being a sole trader.
What is a sole trader?
First we need to establish exactly what a sole trader is. A sole trader is someone who runs their own business and is self-employed. Sole trader businesses are usually small in size. Tradespeople (such as electricians, gardeners, and plumbers), freelance workers (such as web designers, graphic designers, photographers, and artists), and independent contractors (such as couriers, tutors, and food delivery drivers) are common examples of businesses who operate as sole traders.
What are the advantages of being a sole trader?
Now that we have established what a sole trader is, lets look at the advantages of choosing to operate as one.
Total control and flexibility
If you are a sole trader, then you are the sole owner of the business and consequently, have total control over everything in the business. Therefore, unlike other business structures, you won’t need to discuss decisions with directors, partners, or shareholders.
Easy and simple registration
Setting yourself up as a sole trader is extremely straightforward. To set up as a sole trader all you have to do is notify HMRC that you are self-employed (which is completed through registering for self-assessment online), and to choose a name for your business. After this is done, you can start trading immediately (unless you have a business which needs a license to run legally).
Less tax responsibilities
If you are a sole trader, then you have no Corporation Tax to pay and you do not have to submit annual accounts to Companies House as your business is not incorporated. Sole traders only need to submit and pay their Personal Tax Return (also known as a Self-Assessment Tax Return) every year, and if they become VAT registered then file and pay this quarterly.
Lower accountancy costs
If you are a sole trader, then you will have less reporting requirements and deadlines. Consequently, as a sole trader you need less accounting work to be completed which therefore results in lower accountancy costs.
If you are a limited company your annual accounts can be accessed via the Companies House website by anyone. However, if you are a sole trader then your financial information remains private as you are protected by HMRC’s taxpayers’ confidentiality rules. This means that no one can see your finances which a lot of people prefer to them being public, and also means that competitors cannot gain information about your business.
Due to the fact that there are no other owners of the business to share the profits with, then everything a sole trader makes after expenses and tax is theirs to keep. This often results in being a sole trader very financially rewarding.
Easy to change your business structure in the future
It is most often easier to start as a sole trader than to immediately form a limited company. If you started out as a limited company and wanted to change to becoming a sole trader, you would have to go through the process of dissolving your company and stepping down as the director. To change your business to a limited company from a sole trader is, on the other hand, much simpler. All you have to do is submit an application online to Companies House to incorporate the new company and open a bank account in the company name.
What are the disadvantages of being a sole trader?
Of course, there are also some disadvantages of being a sole trader which must be considered.
Indeed, a major advantage of being a sole trader is having total control and responsibility of your business. However, this could also be a disadvantage as it means that you are accountable and responsible for everything.
If you decide to become a sole trader, then both your business and yourself will be seen as one entity. This results in you having unlimited liability for your business and means that any business actions and debts are the responsibility of the owner. Your personal assets and finances are not protected and therefore, being a sole trader can be riskier financially.
Reduced tax efficiency
Limited companies are generally regarded as being more tax efficient than sole traders. This is because limited companies can work around the taxes and increase their income, while sole traders have much less flexibility to work around the tax system.
Usually, lenders are more cautious of sole traders. Consequently, even when sole traders do secure funding, the amount which they can borrow is often less of than that of limited companies and the rates are often not as good.