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Entrepreneurs face a crucial decision early in their business journey. They must choose the most suitable business structure. The sole trader structure is the simplest business structure available in the UK. Sole tradership means an individual owns and runs their business as a sole operator. They assume full responsibility for its management, profits and liabilities. For many, the simplicity of sole tradership offers a straightforward approach to business ownership. It comes with freedom and ease but also the weight of unlimited liability. This article will further explain the advantages and disadvantages of operating a business as a sole trader.
Advantages of Operating a Business as a Sole Trader
1. Ease and Control
Establishing yourself as a sole trader is typically straightforward, with minimal legal formalities and lower initial set-up costs than other business structures.
As a sole trader, you have complete control over your business. Decision-making and day-to-day operations are your responsibility. This flexibility allows you to adapt your business quickly to the evolving market. You do not need to wait for others’ approval to make significant changes.
2. Tax Reporting
You will register to pay income tax through a simple process. When you have registered, you will submit a self-assessment tax return annually. Once you pay tax, any profits your business generates belong to you.
3. Lower Set-up Costs
Operating as a sole trader can mean you incur lower costs when setting up and operating your business. For example, sole traders often do not need professional advice to set up their businesses. However, seeking such advice can help ensure compliance and mitigate potential risks involved in business ownership.
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One area where you may incur higher costs than businesses structured differently is through tax. Depending on your income level, you may pay tax at a higher rate than those who run limited companies.
Disadvantages of Operating a Business as a Sole Trader
1. Lack of Legal Distinction Between Personal and Business Assets
When you operate as a sole trader, the business is not a separate legal entity to yourself. You are personally liable for the business’s debts. Personal liability means your assets might be at risk if your business encounters financial difficulties. Your assets can include your home, for example. Creditors may seize this asset if you cannot meet financial obligations.
2. Access to Capital
A sufficient amount of capital is necessary to sustain and grow any business. Capital raising can be more difficult for sole traders. Lenders may be reluctant to offer you significant capital as they might see you as a higher risk. This limitation might restrict your business’s growth potential.
3. Access to Expertise
Beyond capital, a sole trader is responsible for their whole business, even aspects they know little about. No board of directors is behind you, offering their broad knowledge and experience. To mitigate risk, seek advice. You might seek advice from experienced lawyers, accountants, or business advisors. Doing so can cover areas where you have gaps in your knowledge and skillset, enabling smooth and compliant operations.
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Key Takeaways
If you are self-employed and the sole owner of your business, you automatically become a sole trader. For example, you do not need to register with Companies House to become a sole trader. However, you must register with HMRC to pay income tax through self-assessment.
The following tables outline the advantages and disadvantages this article has discussed.
| Advantages of the Sole Trader Structure | Explanation |
| Ease and Control | Operating as a sole trader can be easier than operating under alternative business structures, especially if your operations are small. For example, you do not need to wait for approval from a board of directors to make significant changes. |
| Tax Reporting | You will register to pay tax through a simple process and annually complete a self-assessment. |
| Lower Set-Up Costs | Setting up as a sole trader is often cheaper than setting up a business under an alternative structure. |
| Disadvantages of the Sole Trader Structure | Explanation |
| Unlimited Liability | Your personal assets are at risk if your business comes into financial difficulty as the business is not a distinct entity from you. |
| Access to Capital | Lenders may be reluctant to offer you significant capital as they see you as a higher risk. |
| Access to Expertise | You can only rely on your skillset as you operate the business alone. You may seek professional advice regarding specific areas of your business. |
You can change your business structure if you initially operate as a sole trader but change your mind further down the line.
If you need advice on setting up a business as a sole trader or help deciding between alternative business structures, LegalVision’s experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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