Anyone who has considered running his own business may have thought about being a sole trader. Often called a sole proprietor, a sole trader can set up a business easily. Cheaper, quicker and more straightforward than incorporation, sole proprietorships are popular in the UK.
Sole traders have full control over how their businesses are run. Any profits made and all of the assets of the business are owned by the sole trader. Although this may seem like good news, all liabilities and debts accrued by the business will also be the responsibility of the sole trader, who is required to register with HM Revenue & Customs as a self-employed individual. Though the accounts of a sole trader are usually far less complicated than a limited company, self-assessment tax forms must be submitted annually.
1. Personal service: sole traders are able to make fast decisions and act quickly to enhance the personal service of their customers as they do not need to liaise with any colleagues.
2. Private data: once a limited company has registered its business, Companies House makes the details public. For sole traders, all details remain private.
3. Control: the day-to-day running of the business is at the discretion of the sole trader and there is no input or decision-making required from others.
4. Profit retention: all profits generated by the business are retained by the sole trader.
5. Specialist: sole traders tend to provide a personal service for their customers, building a reputation and growing the business to local customers in their community.
1. Liability: in law, a sole trader is not considered a separate entity and therefore has unlimited liability. Consequently, the owner of the business is liable for any debts that the business incurs. This could result in a business owner losing his personal savings, home or other assets held personally or in the business.
2. Decision-making: as the sole trader makes all the decisions alone, there may not be help available if needed. This can result in failure, as the burden of success rests on a single person and not a collective force.
3. Finance: it can be harder for a sole trader to raise funds to finance a business. This can make future expansion difficult.
4. Reverse economies: larger corporations and limited companies often have the funds to bulk buy and can price accordingly. A sole trader may not be able to benefit from these cheaper offers and may well have to price his services or products higher to cover additional costs.
As described above, there are both pros and cons to setting up as a sole trader, which is a personal choice based on many factors for someone who wants to start his own business.
The good news is that there are many services and sources available to help anyone set up a thriving new business and many of these are simply a click away on the internet.
This article was contributed on behalf of Brookson Accountants.