04 Apr
Sole Trader Advantages And Disadvantages – The Pros and Cons of a Sole Trader
Sole traders are the simplest business structure in the UK. They are individuals who own and operate a business on their own, without any partners. Sole traders have complete control over their businesses, but they also assume all of the risks and responsibilities. This can be both an advantage and a disadvantage, depending on the individual’s circumstances. It is important to understand sole trader advantages and disadvantages before opting for this business structure.
Advantages Of Starting A Business As A Sole Trader
There are several advantages to starting a business as a sole trader. and we have listed a few below.
Complete Control Over Your Business
Perhaps the most obvious is that you have complete control over your business. You make all the decisions, and you are responsible for all outcomes. This can be both good and bad: it means you have maximum flexibility, but also maximum responsibility.
Most Simple Business Structure
Another benefit is that setting up and running a business as a single trader is rather simple and cheap. There are no complicated legal or financial procedures to follow, and start-up costs are insignificant. Moreover, you can immediately start trading once you have registered as a sole trader.
No Partnership Issues
If you have any problems or disputes with partners, these will not affect your business as a sole trader. You are in complete control, and any disagreements will be between you and the partner(s).
Keep All The Profits
A sole trader’s earnings are taxed only once, at the personal level. You keep all of the gains after tax on your business as a sole trader. You would have to share these if you formed a partnership. If you establish a limited company, you must distribute any profits to any investors/shareholders.
Tax Advantages
As a self-employed individual, you can enjoy certain tax advantages which are not available to employees. For example, you can claim back a proportion of your home expenses as a business expense.
Complete Business Privacy
A limited company must register with Companies House and submit the information that becomes a public record. The owner of a limited company will have to provide business information as well as directors’ and shareholders’ information. This raises the visibility of your firm. You don’t need to register your firm with Companies House as a sole trader, allowing you greater privacy for your business.
Flexibility To Change In Future
It’s simple to transform your company into whatever structure you choose. If you wish to start small and grow gradually, being a sole trader allows this. You may quickly change your company’s form. If the income of your firm begins to rise, for example, you may find it more advantageous to establish it as a limited liability corporation instead of continuing as a sole trader. You can do this in a matter of minutes. It’s not difficult, so you may keep an open mind about future possibilities.
Disadvantages Of Starting A Business As A Sole Trader
Of course, there are also some disadvantages to starting your business as a sole trader. and It is important to read more about the disadvantages of being a Sole Trader before making any decisions.
Unlimited Liability
If you start as a sole trader, it will be regarded as a single entity. As a result, you are exposed to unlimited responsibility for your firm. A limited liability firm and its owner, on the other hand, are seen as two separate individuals. but as the sole trader and their business are considered one and the same, the owner will be liable for any debts or legal actions the company may incur.
More Difficult To Raise Finance
It can be more difficult to raise finance as a sole trader as potential investors may view you as a higher risk. Banks are also less likely to offer loans to sole traders. This is because a limited company has shareholders who can be held responsible if the business fails.
No Separate Legal Entity
As a sole trader, you are not recognised as a separate legal entity. This means that you cannot enter into contracts in your own name; all contracts must be made in the name of your business. If you were to enter into a contract with another party, and your business subsequently went bankrupt, they could sue you personally to recover any money they lost.
Tax May Not Be Efficient
Limited companies are generally considered to be more tax-efficient than sole traders. A limited company director has greater leeway to avoid taxes and increase profits. A single trader, on the other hand, has less freedom to work around the tax system. A sole trader’s personal allowance is £12,570 (2022/23), after which they must pay tax on any additional income at the following rates:
2022/23 Income Tax In England, Wales, And Northern Ireland
| Tax Rate | 2022/23 Tax Band Thresholds | 2021/22 Tax Band Thresholds |
|---|---|---|
| Personal allowance: How much income you can earn before you start to pay income tax. No tax on this income | £0 – £12,570 | £0 – £12,570 |
| Basic rate income tax: 20% tax on the proportion of income that falls into this tax bracket | £12,571 – £50,270 | £12,571 – £50,270 |
| Higher rate income tax: The part of your income that falls into this tax band is taxed at 40% | £50,271 – £150,000 | £50,271 – £150,000 |
| Additional rate income tax: This is the highest rate. The income you earn above this threshold is subject to tax at 45% | £150,000 upwards | £150,000 upwards |
Be The Decision-Maker
Making decisions is considered a positive because you have complete control over the business direction and objectives, but it may be overwhelming, making you feel pressured. It might be stressful to be responsible for the entire business when it is reliant on a single person’s actions and judgments.
Conclusion
Overall, there are both pros and cons to starting your business as a sole trader. It is important to weigh up the options and make a decision that is best for you and your company. If you decide that being a sole trader is not the right option for you, Transferring to a limited company may be the solution you are looking for. Contact us today to find out more!
Author Bio
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for its clients. He is of the firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.
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