The Pros and Cons of Being a Sole Trader or Sole Proprietor

The Advantages and Disadvantages of Being a Sole Trader or Sole Proprietor

Are you launching a start-up company? Are you already running a consulting business? Are you freelancing, working from home and looking to expand?

As a self-employed person you’ll need to make some business and life changing decisions. Your business structure is one of those decisions. This decision can influence how many taxes you pay, what happens if you get sued and the amount of paperwork you have to deal with.

By default, your self-employed business operates as a sole trader or sole proprietorship until you select a different structure. As the simplest way to operate a business, the sole proprietorship has its unique benefits and drawbacks.

What is a Sole Trader, Sole Proprietorship?

The Sole Trader or Sole Proprietorship is the oldest, most conventional, and easiest form of business organization. A sole trader is a business entity owned, managed and named by one person. The sole trader can be organized very informally as it is not subject to much regulation and is relatively simple to manage and control.

The Vast Majority of Small Businesses Start Out as Sole Traders or Sole Proprietorships.

One of the first decisions that you will have to make as a business owner is how your company should be structured. This decision will have long-term implications so think carefully before making a choice. Consider the following:

• How big do you intend your company to grow? Just you, your family, ten employees, ten thousand employees?
• How quickly do you intend your company to grow, is there a five, ten year plan?
• Will you always be in total control or will you employ managers, etc.?
• How vulnerable is your business to lawsuits? Do you need the protection a limited liability company affords?
• What are the Tax implications of the different ownership structures.
• What is the projected profit (or loss) of the business.
• How much ongoing capital needs to be invested in the business. Can this be supplied from profits?
• Do you need a wage, regular or otherwise?

Sole Trader Advantages

By default, your self-employed business operates as a sole trader or sole proprietorship until you select a different structure. These are the advantages of being a sole trader:

• Simplest and least expensive form of structure to create, organize and manage. Just register your business name, get your permits.
• Can trade online with nothing more than a company domain name, website and PayPal.
• The paperwork as a sole trader is minimal.
• Taxes are a major headache for all business. As a sole trader tax reporting is simplified as the government doesn’t make an distinction between a sole trader and the individual. Just keep track of all your business income and expenses and file this with your personal tax return.If your business takes a loss for the year, as many start-ups do, you can use this loss to offset any other income on your personal return. This is a common scenario for those in employment and getting a start-up off the ground.

  If you are in doubt about taxes I suggest you see an accountant and possibly maintain your finances using an accounting package such as Intuit Quickbooks or Sage Accounts.

• Sole traders are in complete and sole control of their business venture and may make decisions (right or wrong) as they see fit.
• A sole trader receives all income generated by the business to keep or reinvest.
• The business is easy to dissolve, if desired.

Sole Trader Disadvantages

While operating as a sole trader is easier, it involves some serious drawbacks as well.

• As there is no separation between the sole trader as an individual and the business. All sole traders have unlimited liability and are legally responsible for all debts against the business.
  Both your business and personal assets are at risk.
  You probably don’t anticipate being sued or unable to pay your bills, but things do happen – make sure you have the necessary insurance to cover your potential liabilities.
• Business expansion can be restricted due the difficulties in raising funds and taking on partners. You may need to change to a corporate structure at this point.
• May have difficulties attracting high-calibre employees.
• Large corporations do not like working with sole proprietorships. You may be the most dependable partner they could ever have but people assume corporations are more legitimate, trustworthy and dependable.
• Some employee benefits such as owner’s medical insurance premiums are only partly deductible from business income.

Planning Your Business

One of the great advantages to being a Sole Trader is the ability to change your mind and hence the direction the business takes.

• That advantage can also be a major disadvantage if you are not organized. Spontaneity is a valuable asset but a reasonable amount of structure and planning is vital if you are to survive.

Write down your business goal(s) complete with a timeline. Note where you are within this goal. Set aside fifteen minutes every month and review both the goal and your position on the timeline. If the goal needs changing, then change it. This should give you a genuine idea of where you are and how close you are to achieving your goals.

Can a Sole Trader Have Employees?

A Sole Trader is an unincorporated business owned by a single individual and just like any other business, can hire employees to fulfil their business’ tasks, as long as they follow appropriate labour and tax laws.

• Sole trader means you are responsible for the business, not that you have to work alone. You can take on staff.

Checklist for Starting a Sole Trader

The following checklist is a very, very simple reminder of the steps to take before you open for business. Depending upon where you are in the world, the start-up requirements might vary from the list below.

• Decide on a business name for your sole proprietorship.
• Check the availability of your chosen business name, its similarity to existing names and possible copyright and trade infringements.
• Check the availability of and register your domain name.
• Register your sole proprietorship name if required.
• Obtain any business licenses and permits.
• In the UK, you must register for VAT if you expect your business’ takings to be more than £79,000 a year.

Types of Business Entity

The following are the main business designations and types which I think you might find of interest:

Partnerships:

• General Partnership. A partnership in which all the partners are jointly liable for the debts of the partnership.
• Limited Liability Partnership (LLP). A partnership where a partner’s liability for the debts of the partnership is limited except in the case of liability for acts of professional negligence or malpractice.
• Limited Partnership (LP). A partnership where at least one partner has unlimited liability and one or more partners have limited liability.

Companies:

• Private Company Limited by Shares (Ltd, LLC, LC, Co) the shares not being traded publicly. A form of business whose owners enjoy limited liability.
• Public Limited Company (plc) a company whose shares may be traded publicly, like the London Stock Exchange.
• Private Company Limited by Guarantee (Limited or Ltd). Directors or shareholders financially back the organisation up to a specific amount if things go wrong.
• Private Unlimited Company (Unltd, Ultd, PLLC). A company either with or without a share capital whose members or shareholders do not benefit from limited liability should the company ever go into formal liquidation. Directors or shareholders are liable for all debts if things go wrong.
• Sole Proprietorship or Sole Trader. A business consisting of a single owner, not in a separately recognized business form.

You must set up the a limited company with Companies House in the UK.

The Pros and Cons of Being a Sole Trader or Sole Proprietor Conclusion

Is being a sole trader the right coarse of action for you or would another solution be better? Sorry, there is no single, right answer that applies to all circumstances and all individuals.

In general, it’s a matter of risk. How much personal liability are you willing to accept? Would you prefer a Limited Liability Partnership, so sharing the risk or even a Limited Liability Company where directors are not directly responsible for a Company’s debts?

All choices have advantages and disadvantages, mainly relating to complexity and administrative requirements. Research all that you can. Speak with a tax advisor or accountant to learn how you can lower your taxes and maximise your profits whilst minimising your risk through your choice of business structure.