SOLE TRADER

What is the definition of a sole trader?

A sole trader is a self-employed person who is also the exclusive owner of a business. The individual is
entitled to all profits of your business after tax has been paid, and liable for all losses.

While sole traders are often thought of as a one-man business organisation, it’s important to keep in
mind that the term ‘sole trader’ refers to the business structure - not the number of employees. While a
sole trader trades alone and is self-employed, it doesn’t mean that he or she performs the day-to-day
operations alone without hiring employees.

What are the characteristics of a sole trader?

1. Full control

As a sole trader, you have sole ownership and full control over your business. You don’t need to consult
with directors or shareholders before making a decision, and are fully in-charge of a wide range of
business decisions - from how your operations are run, to how you want to grow your business or use
your profits.

2. Not a separate legal entity

As a sole trader, you and your business are considered one and the same. There isn’t a separate legal
identity, which means that you’ll be responsible for all the transactions and activities your company is
involved in.

3. Continuity

This relates to the point above. As there isn’t a legal distinction between the owner and business, a sole
trader is dependent on its owner. The company will cease to exist depending on the owner’s personal
circumstances, such as death, retirement, bankruptcy or imprisonment.

4. Unlimited liability

Sole traders assume full legal responsibility for all business debts. There isn’t a limit to the maximum
amount of debt a sole trader is personally liable for, and as such, your personal assets may be seized to
pay for losses incurred by the business.

5. Taxed as an individual

You pay income tax - not corporation tax - on taxable business profits, and are also required to pay Class
2 and Class 4 National Insurance contributions. You’ll also need to register for VAT if your business
turnover exceeds the current VAT threshold of £85,000 (for a 12-month period ending in 2021/22).

6. Minimal admin and filing requirements

There’s little paperwork involved with operating as a sole trader. Apart from your annual Self Assessment
tax return, sole traders aren’t required to file accounts or other documents with Companies House. Do
note that you still need to keep a record of business expenses and income to fill in your tax returns.
7. Privacy

As a sole trader, you enjoy a greater level of privacy as you’re protected by HMRC’s taxpayer
confidentiality rules. Unlike limited company directors, you’re not required to publish your company’s
accounts or details on the Companies House website.

SOLE TRADER – EVALUATION

Sole traders are the most common form of a business organization throughout the world because of a
range of advantages.

This is the simplest way to set up a business organization. As a sole trader is self-employed, he or she is
fully responsible for all debts and obligations related to the business. Creditors with a claim against a sole
trader would normally have a right against all of his or her assets, whether business or personal – this is
known as unlimited liability.

As a sole trader, the owner of the business performs all the functions required for the successful
operation of the business such as securing the capital, establishing and operating the business on daily
basis, assuming all risks, taking all profits but also facing all losses, and paying all TAXes.

Let’s take a look at advantages and disadvantages of being a sole trader.

Advantages of sole traders include:

1. Being your own boss. Sole traders are self-employed which means that they do not take orders or
directions from anyone. They have total decision-making power and complete control over their
business without interference. They do not answer to anybody else because they are owners in direct
control of decision-making. Hence, all decisions are made very quickly as sole traders do not need to
seek approval from a supervising manager. They make all of the decisions, have flexibility as to dictate
their own working days and hours, and enjoy high self-esteem from being successful or suffer greatly
from failures. This flexibility allows sole traders to choose times, holidays and matters of working, and
can provide more free time for family arrangements.

2. Few legal formalities. It is very quick and easy to set up a business as a sole trader. With greater
freedom from bureaucratic regulations, the business can often be set up with a small amount of start-up
capital. Administrative costs and start-up costs are much lower in comparison to starting other types of
business organizations such as a private-limited company. A person setting up a house painting business
only needs to buy a ladder, bucket, few brushes and a set of working clothes, hence minimal working
capital is required to do so.

3. Keeping all the profit. The sole trader, as the only owner, receives all of any profit after TAX made by
the business. It gives the individual a huge incentive to work very hard and to become successful in the
future. There is also no need to disclose the amount of profit earned, therefore sole traders enjoy full
privacy and confidentiality. Unlike other types of business organizations, sole traders do not have to
make their financial records available to the public, except letting TAX authorities to scrutinize final
accounts every year.
4. Personalized service. Sole traders can take into account individual customers’ needs to provide a
personalized service to customers as a result of flexibility. This is something that larger firms might not
be willing to offer due to the need to maintain certain level of profitability, or may not be able to do due
to stiff procedures. When operating as a small business, sole traders have the time to get to know better
all their customers and their preferences. Sole traders also offer family-like culture establishing close
personal relationships with their employed customers and workers. Some customers prefer to directly
deal with the owners and are prepared to pay higher price for this privilege. Because sole traders often
start their business based on the interests or skills, they are very passionate to talk with others about
their activities.

Despite of its popularity around the world, being a sole trader and running a business organization on
your own has several disadvantages.

Disadvantages of sole traders include:

1. Unlimited liability. The owner of the business has unlimited liability for all the debts of the business,
therefore risking losing personal wealth and belongings to pay for these debts. Having unlimited liability
means that all of owner’s assets and even savings are potentially at risk. As an unincorporated business,
there is no upper limit to the amount of debts that a sole trader is legally responsible for, if the business
fails. In case of dispute, the owner will be sued personally.

2. High risks of failure. Sole traders are among small businesses that have very high rate of failure with
many of them not even surviving the first year of operations. It is because they face huge threats from
larger firms that have been more established on the market, therefore making it difficult for smaller
businesses to attract customers, break-even and make profit. Sole traders face high workload and stress
as they need to work very long hours to make a living from their business which is developing rather
slowly in the initial stage. Owners need to perform all business functions (finance, marketing, human
resource management and production) by themselves making it very unlikely that they are going to be
equally effective in all of them.

3. Limited sources of finance. Trying to expand is also problematic due to the lack of sources of finance
available to sole traders. They find it difficult to secure any funds beyond their personal savings, small
personal loans from family members, or profits from the past years retained in the business. Even
though they might be entitled to government support in the first year of existence as many governments
tend to support business start-ups, sole traders often face difficulties in raising additional larger capital
to expand the business at later stages. This is because of lack of sufficient collateral such as buildings or
land.

4. Poor competitiveness. Sole traders are not able to exploit the benefits of large scale production,
therefore cannot benefit from economies of scale. As they face higher cost of production, they are not
able to compete with other businesses on price. The prices for products offered by sole traders will most
likely be higher than other companies offering similar products, making the business less competitive
against larger rivals in the industry. Many sole traders also have limited know-how, lack some of the
essential business skills needed for managing a business, nor specialize in areas of the business that are
interesting.
5. Lack of continuity. The running of a business will not continue, if the owner is not physically present. It
may happen when a sole trader decides to discontinue the business operations, relocates to another
country, becomes severely ill making him unable to work, retires or passes away. There will be lack of
continuity in business organization in this absence of the owner, as the business does not have a
separate legal status, hence the business will no longer exist. When the sole trader goes on long
holidays, the business will also shut down for a certain period of time leading to loss of income.