It’s an exciting time when you start a business, packed with big dreams, important decisions, and confusing terminology that might not make sense yet.
One of the first things you’ll need to decide is how your business should be structured legally. There are several options to choose from, but in this article, we’ll focus on what it means to be a sole trader.
What is a sole trader?
Registering as a sole trader is the most straight-forward business structure and a popular way to kick a new business off. It means you are the sole owner of your business and can completely control how it’s run.
Unlike with a limited company, there is no legal distinction between you and your business, so whatever happens to the business happens to you. It means you’re personally responsible if the business has debts – which can be daunting – but also that any profits you make are yours to keep once you’ve paid taxes and other expenses.
What are the advantages of being a sole trader?
The are some real plus points but as ever, your perception largely depends on what you need from the business structure you choose!
Easy to set up
Setting up as a sole trader is very simple indeed. You don’t need to register with Companies House or file annual accounts like limited companies have to. You’ll simply need to sign up for Self Assessment as a self-employed sole trader, and away you go.
The simplicity of this is a big draw for many small business owners who want to get started quickly without jumping through hoops. You’re still very welcome to perform some celebratory hoop-jumping if you wish.
Total control of your business
As a sole trader, you’re the boss – the only boss. You have full control over all business decisions, from your products to your prices, as well as how to manage your finances.
This level of control can be extremely liberating, especially if you’re a self-starter with clear goals around what you’re looking to achieve. It can also be terrifying, and you’re not alone if you feel like that.
Simple tax affairs
Another big benefit of being a sole trader is that your tax affairs are pretty straight-forward. You’ll only need to file a Self Assessment tax return each year. It is worth noting that sole traders are taxed on any profits the business makes, whether or not you actually take them out of the business to use for yourself.
Lower admin costs
Running a business as a sole trader usually means lower administrative costs. You may be able to manage your bookkeeping and tax returns yourself, especially if your business is fairly small. This cost-saving can be a lifesaver when you’re just starting out and trying to keep things as cheap as possible.
What are the disadvantages of being a sole trader?
Like most things in life, where there are pros there are also cons – depending on your circumstances. In terms of being a sole trader, there a several common considerations.
Unlimited liability
One of the biggest disadvantages of being a sole trader is that you have unlimited liability. This means that if your business hits financial trouble, your personal assets (like your home or car) could need to be sold to pay the business’s debts. Additionally, unlike a limited company, a sole trader’s personal and business finances are intertwined.
Credibility and perception
In some industries, being a sole trader might be thought of as less credible or established than a limited company (yes it can seem unfair!).
Some clients, especially larger organisations, may prefer to work with limited companies as they’re often seen as more professional or reliable. This perception can sometimes make it more challenging to secure new clients or contracts.
Difficulty in getting funding
Sole traders may find it trickier to secure financing than limited companies. Banks and investors often see limited companies as less risky because their accounts are published publicly, or because they can take company shares in exchange for investment.
If you think you might need significant external funding to grow your business, setting up as a sole trader might limit your options.
What else should I consider?
Deciding whether to run your business as a sole trader really boils down to your personal circumstances, tolerance for risk, and business goals.
How comfortable are you with risk?
If you’re comfortable with the potential risks associated with unlimited liability and are confident in your ability to manage your business finances effectively, being a sole trader could work well. However, if the thought of your personal assets being at risk is a big worry, you might want to think about other business structures like becoming a limited company.
Tax issues
As a sole trader, you’ll pay income tax on any profit your business makes. As your business grows and your profits increase, you might find that you want to keep some of the profits in the business to fund growth.
Depending on your profits and any other income you receive, this might also be less tax efficient than it would be if you were to pay yourself as the director and shareholder of a limited company.
The nature of your business
The type of business you’re running can also influence your decision. If your business is small, low-risk, and doesn’t need a lot of outside funding, the flexibility and ease of being a sole trader can be really appealing. On the other hand, if you’re looking to grow fast, take on hefty debt, or need to build credibility with larger clients, forming a limited company might be a better way forward.
Long-term goals
What do you want your business to look like in a few years’ time? If you’re planning to keep your business small and manageable and don’t want to grow too fast, being a sole trader could be perfect. However, if you really want to scale up, bring in partners, or even plan to sell the business later on, starting as a limited company could give better flexibility.
It’s a personal choice
The autonomy, simplicity and lower costs of being a sole trader are appealing, particularly if you’re starting small. But there are risks too and it’s a very personal decision. Ultimately, choosing the right structure is an important step in building a successful business and it needs to be right for you.
Are you a sole trader looking for bookkeeping software? Learn more about Pandle’s bookkeeping tools and create your account today.
