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A sole trader or sole proprietor is someone who establishes and operates a business on their own. Being a sole trader can be a very rewarding, yet risky form of business to operate in. Let's take a look at why this may be.
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.
A key benefit of operating as a sole trader is that it is easy to set up the business. 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.
Another benefit of being a sole trader is the ability to keep all the profits from the business.
Some people also like being their own boss and not being supervised or managed by others. Sole traders enjoy certain freedoms that other working individuals do not.
One of the disadvantages of operating as a sole trader is that you are responsible for all your decisions if something goes wrong. As a sole proprietor, you have little to no guidance on dealing with problems if something happens to your business. You also have unlimited liability, which means you are personally responsible for your business' losses and problems. For instance, if you borrow money from a bank and cannot repay your debt, you may risk losing personal possessions like your house or office.
Unlimited liability is essentially the opposite of limited liability.
As a sole trader, you work primarily on your own. This can get lonely and demotivating at times, especially when you are under a lot of pressure to perform several different tasks at once. In these instances, it can be very demanding and difficult to manage your time. You can also risk losing customers and profits if you take time off and close your business.
Another disadvantage is that it can be challenging to grow your 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.
Advantages of a Sole Trader | Disadvantages of a sole trader |
| Easy to set up. | Risk of losing customers if you take time off. |
| Quick decision-making process. | Pressure to deal with everything by yourself. |
| Be your own boss. | Solely responsible for all your decisions. |
| Freedom to make your own decisions. | Can be lonely working on your own. |
| Direct contact with clients and the market. | Risks of unlimited liability. |
A sole trader is a business that is owned and managed by one person. It is a relatively popular form of business. There are various types of occupations you can have as a sole trader.
Tradespeople: plumbers, electricians, or gardeners.
Freelance workers: graphic designers, web designers, photographers, or artists.
Independent contractors: tutors, food delivery drivers, couriers.
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.
A sole trader or sole proprietor is someone who establishes and operates a business on their own. They can employ other people if they want, but the sole trader makes all business decisions individually. People operating a sole trader business work for themselves and are responsible for all business activities and decisions involved in running the business.
A person who is the sole owner of a business and makes all business-related decisions themselves. A sole trader is entitled to all the profits their business makes and is personally responsible for all the losses and debts of the business. There is no distinction between the individual and the business (unlimited liability).
Unlike other different types of businesses, such as companies, you do not need to register a sole trader with any government body. As a sole trader, you can start operating whenever, as long as you declare your profits and income to the HMRC (Her Majesty's Revenue and Customs). You need to declare these profits for tax purposes.
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