Sole traders are the simplest business structure in the UK. They are individuals who own and operate a business independently without any partners. Sole traders have complete control over their companies and assume all risks and responsibilities. Depending on the individual’s circumstances, this can be both
an advantage and a disadvantage. Before opting for this business structure, understanding the sole trader advantages and disadvantages is important.
Learn how Selecting the Right Business Structure for Your Startup can impact your control, risk, and responsibilities.
Advantages Of Starting A Business As A Sole Trader
Starting a business as a sole trader has several advantages, which we have listed 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 at the personal level only once. As a sole trader, you keep all the gains after tax on your business. You would have to share these if you formed a partnership. When establishing a limited company, you must distribute profits to the investors/shareholders.
For a deeper understanding of other business setups and key financial considerations, explore these helpful guides
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 small 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. Suppose the income of your firm begins to rise, for example. In that case, 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, starting your business as a sole trader has some disadvantages. It is important to read more about these 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
Raising finance as a sole trader can be more difficult, 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.
If you’re looking for alternative funding options, these guides on government grants and startup support might help.
No Separate Legal Entity
As a sole trader, you are not recognised as a separate legal entity. This means you cannot enter into contracts in your name; all contracts must be made in the name of your business. If you were to agree 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 allowance is ยฃ12,570 (2022/23), after which they must pay tax on any additional income at the following rates:
Learn more about tax efficiency and strategies for businesses, including director responsibilities and tax-saving options, through the following resources:
2022/23 Income Tax In England, Wales, And Northern Ireland
| Tax Rate | 2022/23 Tax Band Thresholds | 2021/22 Tax Band Thresholds |
|---|---|---|
| Personal allowance:ย How much income you can earn before you start to pay income tax. No tax on this income | ยฃ0 โ ยฃ12,570 | ยฃ0 โ ยฃ12,570 |
| Basic rate income tax:ย 20% tax on the proportion of income that falls into this tax bracket | ยฃ12,571 โ ยฃ50,270 | ยฃ12,571 โ ยฃ50,270 |
| Higher rate income tax:ย The part of your income that falls into this tax band is taxed at 40% | ยฃ50,271 โ ยฃ150,000 | ยฃ50,271 โ ยฃ150,000 |
| Additional rate income tax:ย This is the highest rate. The income you earn above this threshold is subject to tax at 45% | ยฃ150,000 upwards | ยฃ150,000 upwards |
Be The Decision-Maker
Making decisions is considered positive because you have complete control over the business direction and objectives, but it may be overwhelming and make you feel pressured. Being responsible for the entire business might be stressful when it relies 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!
Additional Resources
