Starting a business can be a challenging yet rewarding experience. One of the key decisions that entrepreneurs face is choosing the right business structure. Among the various options available, the sole trader business structure is a popular choice, especially for small businesses. Want to find out more? Read on!
Sole trader definition
A sole trader or sole proprietor is someone who establishes and operates a business on their own.
This individual sole trader is responsible for all aspects of the business, including making decisions, managing finances, and assuming liability for any debts or legal issues that may arise. It is a straightforward and flexible business structure that offers the owner complete control over their company. It is an excellent option for individuals who are just starting out and want to keep their business operations simple and manageable.
Operating as a sole trader
People operating a sole trader business work for themselves. Sole traders can hire other people to work with them; However, the only person responsible for the business is the individual operating as a sole trader. They are responsible for all overall business activities and are actively involved in running the business.
The characteristics of a sole trader include:
Confidence: to make decisions and take responsibility for your decisions.
Specialised skills: to succeed at what they do (i.e., plumbing, graphic design, or cutting hair).
Managerial skills: to run the business and keep updated business records.
Flexibility: for carrying out tasks like contacting clients or keeping in touch with manufacturers.
Self-discipline: all business activities are in their own hands. They do not report to an executive, which also means that they do not get advice from anyone.
Motivation: the business will fail to operate unless the sole trader puts in time and effort.
Characteristics of a sole trader
Sole trader benefits
Operating as a sole trader offers several benefits, including:
- being your own boss;
- you have complete control over decision-making;
- it is easy and cheap to set up;
- you have full control over the profits.
These benefits can make the sole trader business structure an ideal option for individuals who want to start a small business and have complete autonomy in decision-making and management.
In the UK, sole traders can start trading as soon as they wish, as there is no need to set up the business officially with a government establishment. As long as a sole proprietor declares their profits to the HMRC (Her Majesty's Revenue and Customs), they are all set up. It is important to declare profits in order to be taxed appropriately.
Sole trader disadvantages
While operating as a sole trader has many benefits, it is important to consider the potential drawbacks.
Some of the major disadvantages of this business structure include the following:
- Unlimited liability, which means that the sole trader is personally responsible for all the debts and losses incurred by the business, including the risk of losing personal assets in the case of bankruptcy or inability to repay loans
- Lack of support and guidance, as the sole trader must handle all aspects of the business, including dealing with problems and managing finances
- Working primarily on your own, which can lead to feelings of isolation, especially during periods of stress, and can make it difficult to manage time effectively. You can also risk losing customers and profits if you take time off and close your business.
- Limited access to funds, which can make it challenging to grow the business. Often sole traders do not have enough funds for expansion, as they need to use their own money if they wish to grow their business. It is possible for a sole trader to take out a loan, but this can be tricky sometimes, as banks may charge high-interest rates because of the risk of the sole trader not being able to repay their debts on their own.
It is important to carefully weigh these factors before deciding whether the sole trader business structure is the right choice for you.
Sole trader advantages and disadvantages summary
To summarise the advantages and disadvantages of operating as a sole trader, we have prepared this table:
Advantages of a Sole Trader | Disadvantages of a sole trader |
| Easy to set up. | Unlimited liability |
| Quick decision-making process. | Lack of support and guidance |
| Be your own boss. | Solely responsible for all your decisions. |
| You have full control over the profits | Limited access to funding |
| Direct contact with clients and the market. | Risk of losing customers when taking time off |
Sole trader examples
It is a relatively popular form of business. There are various types of occupations you can have as a sole trader. Sole trader examples include:
Tradespeople: plumbers, electricians, or gardeners.
Freelance workers: graphic designers, web designers, photographers, or artists.
Independent contractors: tutors, food delivery drivers, couriers.
Setting up as a sole trader
Operating as a sole trader is a fast and simple way of offering your services. As an example, let's take a look at Chloe, who is a freelance copywriter. As a copywriter, Chloe writes articles and blog posts for companies, promoting their products and services, encouraging readers to visit their websites. She enjoys reaching out to clients, networking, and setting up her own schedule. Chloe sets up a sole proprietorship so she can enjoy flexible working hours, make her own decisions about her business, and has the freedom of not having to report to a manager.
Her business can respond directly to the needs of her clients, engage with them on a personal level, and make decisions freely about the number of clients she takes on. Although Chloe can make all these decisions on her own, it does not mean that she will always make the right decisions for her business. Sole proprietors need to be careful and approach their operations from a managerial perspective. Otherwise, they risk losing track of their goals.
Sole Trader - Key takeaways
- A sole trader or sole proprietor is a business that is owned and managed by one person.
- A sole trader is confident about making decisions on their own; has specialised and managerial skills; and is motivated, flexible, and can manage their time efficiently.
- An important factor to consider when setting up a sole trader is unlimited liability, meaning the individual is solely responsible for all problems and losses that the business incurs.
- There is no distinction between the individual (sole trader) and the business.
- There are several benefits and potential falls of a sole trader.
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