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5 Min. Read

Sole Trader Advantages & Disadvantages

Sole Trader Advantages & Disadvantages

Are you just starting out in business or are you making a transition? How do you know if you should become an unincorporated business, a limited liability company or a sole trader? Which business structure is going to suit your needs best?

Those are often going to be some of the first questions that you ask yourself. A sole trader business comes with lots of advantages. You get to be your own boss and guide your business in the direction you want it to go. As well, you will be the one who makes all the big decisions for things like accounting, marketing and advertising.

But there can also be some disadvantages to a sole trader structure that are worth knowing about. Here’s what you need to know about all the advantages and disadvantages of being a sole trader.

Here’s What We’ll Cover:

What Is a Sole Trader?

Advantages of a Sole Trader

Disadvantages of a Sole Trader

Key Takeaways

What Is a Sole Trader?

Sometimes also known as sole proprietorships, a sole trader is a business that’s controlled and owned by one person. They make all the big decisions, take on all responsibility and keep any profits from the business.

Common sole trader businesses include plumbers, electricians and gardeners. They often get a large portion of their business from word of mouth marketing. You can also set up a sole trader business as a limited company that’s regulated under IR35 legislation. Take a look at the HMRC website or get professional advice for more information.

Advantages of a Sole Trader

There can be several advantages to being a sole trader. You have full control of strategy and daily decision making and starting a sole trader business is a simple process. Here are some of the biggest advantages of being a sole trader.

You Are In Control

You don’t have to take direction from anyone else or ask for permission to make a business decision. You have complete control over the business as a sole proprietor and its daily operations. Which also means you get to decide the direction it goes.

Keep in mind that you are legally required to let Inland Revenue know that you have started a sole trader business within three months.

You Don’t Have to Manage Staff

There’s no need to monitor and manage payroll or create weekly schedules when you're the sole owner. This can save you a ton of time and effort to focus on other areas of your business. Plus, not having staff means that you keep all the business income profits made by your business.

Quicker Decision Making

One of the biggest challenges of working for a larger corporation is that it can take some time for decisions to get made. As a sole trader, you’re the only one who gets to decide what happens with your business. So many decisions that need to get made can happen quickly and get implemented as soon as possible.

This also allows you to adapt and evolve to new trends and customer demands. You can stay on top of what your customers want and appeal directly to them. You can invest in new business assets, for example.

Disadvantages of a Sole Trader

Even though there are lots of advantages to being a sole trader, there are also some disadvantages. Depending on the type of business that you do, a different business structure might suit your needs best. Here are some of the biggest disadvantages to being a sole trader.

You Are Responsible for Liability

Personal liability is probably the biggest disadvantage of a sole trader. Since you are the owner of the business you are the only one liable for anything that happens to your business. If a customer gets injured or your business fails, for example, you are liable for any associated costs.

The Business Goes As You Go

If for some reason you can’t work or you need to take some time off, your business will stop. You might have some automated processes, but as the business owner, any business actions are made by you. So if you become sick or have an accident it could negatively affect your business.

Value-Added Tax (VAT)

As a sole trader, you still need to keep accurate records of all your sales, profits and expenses. This is because you are still required to pay income tax and National Insurance liabilities each year. Your VAT rate will depend on the goods or services that you sell.

You must register for VAT if your taxable turnover exceeds the annual threshold. Check the HMRC website for a full breakdown of VAT rates. So it's important to keep in mind you still have some tax liability on personal income.

Key Takeaways

Working for yourself can be great. You can set your own hours and work whenever works best with your schedule. Plus, you’re the one who gets to make all the big business decisions. Since you’re the owner of the business, you also get to keep all the profits that you make.

While there are several advantages to being a sole trader, it comes with some disadvantages as well. You are solely responsible for any liability if something happens. You could get sued or your business could fail and you might owe money.

If that happens, it means that you are liable for any legal costs or other costs that arise. So it’s important to weigh your options when deciding on a business structure. Make sure you choose the one that suits you and your business best.

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