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.