What are the Disadvantages of Being a Sole Trader?

Government data shows that 56% of all private sector businesses in the UK are sole traders which equates to around 3.1 million businesses.

The sole trader business structure is therefore extremely popular, and with good reason. Operating as a sole trader is relatively simple. It’s quick and cheap to get up and running, the admin requirements are low and business owners have full control and a lot of flexibility.

But as with any other business structure, there are some disadvantages of being a sole trader. While we don’t want to focus on the negatives, understanding these disadvantages is important so you can make an informed decision about whether this structure aligns with your business goals and circumstances.

In this post we’ll explore the disadvantages of being a sole trader and how appointing an accountant can mitigate them and keep your businesses on the right track.

1. Financial Risk

One of the main disadvantages of being a sole trader is that you’ll face an elevated level of financial risk. The business owner and the business itself are the same legal entity which means the owner has personal liability for any business debts.

This is known as unlimited liability and it can place the personal assets of the owner at risk from creditors if the business has financial difficulties. This means that personal ownership isn’t really suitable for businesses operating in high-risk sectors such as professional and financial services where there is high liability, stringent regulation and a higher possibility of legal action.

How an Accountant Can Help Mitigate Financial Risk

• Implement robust financial management strategies to keep your business finances healthy
• Advise on strategies to safeguard personal assets such as contractors insurance or transitioning to a limited company
• Implement budgeting and cash flow control to keep the business financially resilient

2. Growth Can Be Challenging

Achieving growth can be difficult for sole traders for a number of reasons. Raising capital can be difficult as investors and lenders view sole traders as higher risk, and as such sole traders may struggle for approval or pay a higher rate of interest on loans.

Sole traders will also usually pay a higher rate of taxes so there can be less funds to reinvest and the motivation and capacity of the owner is also a factor. Sole traders can be extremely busy and therefore might not have the time to devote to networking or marketing activities.

How an Accountant Can Help Your Business Grow

• Managing your tax obligations and the financial management of your business meaning you can focus more time on growth
• Reduce your tax liability and help with cost-cutting which means there’s more funds to invest in marketing activity or software and equipment to boost productivity
• Help to secure funding and advice on alternative options such as Government grants

3. You Could Pay More Tax

The relative level of efficiency from a tax perspective is a key disadvantage for sole traders. As a sole trader you can pay more tax compared to a limited company due to the different ways that the business structures are taxed. Sole traders pay income tax on all taxable profits made by the business. This means that as profits increase over time sole traders can end up paying more tax as they move into higher tax brackets.

The situation is different for limited companies. They pay corporation tax on their taxable profits which are usually taxed at a lower rate than income tax. In addition, they have more scope to reduce their tax bill by claiming allowable expenses and remuneration can be more tax-efficient by structuring through a combination of salary and dividends due to dividend tax rates being lower than income tax.

How an Accountant Can Help Reduce Your Tax Bill

• Make sure that you’re claiming all available allowable expenses, reliefs and deductions
• Advise you if its beneficial from a tax perspective to incorporate and handle the company formation for you
• Ensure that you’re compliant with your tax obligations so you don’t incur any fines or penalties

4. A High Workload

Having a high workload isn’t peculiar just to sole traders, it’s a challenge that is common amongst all self-employed people irrespective of business structure. But data from the Office for National Statistics indicates that around 85% of sole traders have just 1 employee.

As a sole trader working alone, you have responsibility for all aspects of your business including completing your day-to-day work, marketing and winning new contracts and fulfilling your tax obligations and ensuring compliance if you don’t have an accountant.

It goes without saying that this can be extremely challenging and you might end up working long hours. Of course people move into self-employment with their eyes open knowing that they will likely have to work long hours but by engaging an accountant you can ease the pressure.

How an Accountant Can Help Ease The Pressure

• Manage your tax affairs and ensure your tax returns are completed and filed accurately and on time
• Provide you with accounting software so you can benefit from automation and on-to-go bookkeeping
• Handle the financial management of your business so you can focus on growth

5. Business Credibility

The general perception of sole trader businesses is that they are less established than their limited company counterparts. Of course this can’t be quantified, but potential clients and lenders view sole traders as being less stable and there can be a negative impact from this when trying to secure funding or when competing with a limited company for a contract.

Sole traders also have fewer reporting obligations and are less stringently monitored and regulated which in some ways is a positive for them, but not from a business credibility perspective. The issue of reduced business credibility can of course be mitigated to an extent by being professional and reliable, building a solid client base and a strong online presence with lots of positive reviews.

How an Accountant Can Help Boost Business Credibility

• Provide accounting software to produce professional branded invoices and payment reminders for clients
• Help you to be compliant and offer industry-specific support and guidance
• Incorporate your business

Sole Trader Accounting With Gorilla

There are various advantages of being a sole trader including simplicity and full autonomy over your business but understanding the sole trader disadvantages covered in this post is important too. Self-employment can be very challenging and appointing an accountant can make a huge difference to ease the pressure so you can focus on what you do best.

Our accountancy service is tailored for the self-employed and sole traders and our sole trader accountancy package is just £59 + VAT per month. You’ll work with your own dedicated accountant who will expertly manage all your business and personal accounting needs.

They will be in your corner to provide unlimited support, advice and guidance with a guaranteed same working day response to your queries no matter how many times you contact us. Full access to industry-standard MTD-compliant FreeAgent cloud accounting software is also included at no extra cost.

To learn more about the sole trader business structure or our sole trader accountancy service, request a callback to speak to a member of our team.