Sole trader

Sole Trader: Characteristics

  • A sole trader is a person who sets up and operates a business alone.
  • The owner has unlimited liability, meaning they are personally liable for all the business’s debts.
  • This business structure is easy and straightforward to set up as it does not require formal procedures.
  • As the sole owner, the trader has full control over the business decisions.
  • Sole traders are entitled to all profits that their business generates.
  • The identity of the sole trader and the business are legally the same.

Sole Trader: Advantages

  • The owner has full control over all decisions and can change the motives and direction of the business quickly and easily.
  • All profits from the business belong entirely to the sole trader.
  • There are few legal and financial regulations to set up as a sole trader hence reduced paperwork.
  • Personal relationships with customers and employees can be stronger, which can result in more business and higher staff loyalty.
  • The business affairs are confidential as there is no legal requirement to publish accounts.

Sole Trader: Disadvantages

  • The sole trader has unlimited liability, potentially putting personal assets at risk.
  • Generating capital for the business can be challenging as sole traders may find it hard to raise finance.
  • Often, the successful operation of the business relies heavily on the presence of the sole trader. It can be disruptive if the owner is unavailable due to sickness or other reasons.
  • Running a business alone can be demanding and stressful without the support of a business partner or employees.
  • Sole traders may find it difficult to specialise if their knowledge and skills are not broad. It may require hiring specialist employees which would increase costs.

Sole Trader: Responsibilities

  • Sole traders must register as self-employed with HM Revenue and Customs (HMRC).
  • They are responsible for managing their own tax and National Insurance contributions.
  • Regular financial records and accounts need to be kept for tax purposes.
  • Some sole traders may have to register for VAT if their turnover is above the current VAT threshold.