The Lowdown on Sole Traders: Definition, Challenges and Benefits

Sole trader is a popular business structure for entrepreneurs entering self-employment but there are many factors to consider before deciding if sole proprietorship is right for you. The business structure you choose has many implications including how much tax you pay, your record-keeping obligations and overall admin burden to the amount of financial risk you face.

Before we assess the advantages and disadvantages of this business structure, let’s get a sole trader definition.

What is a Sole Trader?

A sole trader, also referred to as a sole proprietor, is a person who owns and runs their own business as the sole owner and is personally responsible for, and in full control of, its operations. They are also personally responsible for any business debt. From a legal standpoint, the business owner and the business itself are considered the same legal entity.

What are the Advantages of being a Sole Trader?

Simplicity and Quick Setup

Sole trader is the simplest business structure and this is reflected in terms of how quickly and easily you can get your business setup and trading. Formalities in terms of setting up as a sole trader are minimal – decide on your business name, register for self-assessment tax with HMRC as well as any relevant National Insurance Contributions. You’ll also need to register for VAT if you expect turnover to exceed the VAT threshold of £90,000. Tax, admin and reporting obligations are also less onerous for sole traders compared with limited companies.

Low Operating Costs

Because sole trader is an inherently simple business structure you also benefit from low operating costs and increased cost-efficiency. As a sole trader you will likely work from your home or a small office which means less overheads such as rent, and you’ll likely work alone so you don’t have to pay a salary to any employees.

There’s less regulatory compliance too which mitigates the cost and time burden associated with this, and working with an accountant for sole traders will be cheaper too! Lower operating costs plays a significant role in financial stability and business growth as it translates into higher profit margins.

Protect Your Privacy

If you operate through a limited company, there are mandatory filing requirements that have to be made with Companies House. This includes financial statements, the company accounts, the registered address of the business and details about the company directors and this information is available in the public domain.

Sole traders benefit from a greater degree of privacy as this information doesn’t have to be disclosed which means their financial and business details remain private as there are fewer public records available. Less mandatory filing requirements means you save time as well!

Are there any Sole Trader Disadvantages?

Sole trader is just like any other business structure in the sense that it has disadvantages (as well as advantages!) and it’s important to understand these before deciding if personal ownership is the right fit for you. Let’s examine some of the main challenges sole traders face.

More Financial Risk

One of the most significant disadvantages of operating as a sole trader is that you face an increased level of financial risk compared to those operating through a limited company due to unlimited liability. From a legal standpoint the owner and their business are one and the same.

This means that the owner is personally liable should the business incur debt or run into legal issues. As a result their personal assets such as their house and investments could be pursued by creditors. Personal ownership means personal responsibility for the businesses’ debt. The picture is different for limited companies who benefit from limited liability which means the director’s financial risk is limited to the amount they have invested into the business as it’s a separate legal entity from them.

These are important factors to consider when you choose your business structure in terms of how confident you are of success and how much financial risk you are prepared to face.

It’s more Challenging to Scale your Business

Every self-employed person wants to grow their business but this can be more of a challenge for sole traders. Sole traders will usually find it harder to raise capital and attract investment compared to limited companies. Part of this is to do with the perception of limited companies being more stable and secure.

Sole traders are also unable to raise capital by issuing shares and can’t pool resources with other shareholders or directors to generate funds. Your capacity to work can also be a limiting factor as there might come a point where you’re unable to take on more work and may have to consider employing someone. It’s a good idea to take out relevant contractor insurance to protect you should you be unable to work through illness or injury.

Time Pressures and Isolation

When you’re self-employed you’ll be contending with many spinning plates! This is especially the case when you’re a sole trader as you and you alone are the business. You’ll have multiple concurrent tasks to handle such as pitching for new work, admin and record-keeping, marketing, staying on top of your tax affairs and actually doing the work for which you get paid. You might be contending with tight deadlines and multiple projects or contracts at once.

With personal ownership you don’t have other directors or partners to fall back on and share the load so effective time-management is vital and you might have to be prepared to work long hours, especially when your business is in its infancy. The success of a sole trader business is dependent on the knowledge, commitment and skills of the owner but appointing an accountant for sole traders can be a huge help.

We are Expert Sole Trader Accountants

One of the best decisions you can make as a sole trader is to work with a sole trader accountant. Gorilla are the UK’s most trusted accountants and have a wealth of experience and expertise helping sole trader businesses to flourish.

With Gorilla you receive unlimited support and tailored advice from your own dedicated accountant and you’ll always get a prompt turnaround to your queries thanks to our Client Service Guarantee. Full access to industry standard FreeAgent accounting software is included in our great value fixed-fee sole trader accounting package which is only £50 +VAT per month.

When you appoint Gorilla you can rest assured that your business and personal finances are in expert hands allowing you to focus on your business. Call 0330 024 0406 to speak to an accountant today if you have any queries about or sole trader accounting service or request a callback here.