Are you thinking of starting your own business but not sure about the legalities surrounding it? Well, we are going to explain what it means to be a sole trader, the benefits you will have and the risks you will take.
What is a sole trader?
Basically, if you are self-employed and are the sole owner of your business where you are liable for all its costs, you are classed as a sole trader.
So whether you’re a hairdresser, plumber, freelance copywriter or own your own newsagent, if your business is owned and controlled by you and you alone, you are a sole trader.
Still not sure? Well consider these things:
- Do you run your business for yourself and take full responsibility for its success or failure
- Do you have several customers at the same time
- Can you choose how, when and where you do your work?
- Can you hire other people at your own expense to help you do the work you need?
- Do you provide the main items of equipment you need for your work?
- Are you responsible for finishing work on your own time?
- Do you charge an agreed fixed price for your work?
- Do you sell goods or services to make a profit?
If you have answered yes to one or more of those questions, then it is very likely that you should register as a sole trader so you can get going with your new business.
The biggest difference between being a sole trader and other ways to work for yourself is that you are personally liable for the firm’s debts.
This is called unlimited liability and it’s perhaps the most daunting risk you have to weigh up against the many benefits that being a sole trader can bring.
What are the benefits of being a sole trader?
Starting your own business is very exciting and to make sure you make the most of it it is important to understand all of your options. Below we have listened to some of the numerous benefits you will have as a sole trader:
- It is extremely simple to become a sole trader. All you have to do is register your business name and you can start trading. There is also much much less paperwork involved than say, going limited, which has the knock-on effect of cheaper accountancy costs.
- You have all of the control as the sole owner. This means you can make all the decisions as you see fit, running your business in a way that suits you. Being this hands on means you can act quicker and potentially provide for your customers needs much more swiftly than if you had to consult with others.
- The profit is all yours. You are the sole owner and therefore every penny you make as a profit (after tax, of course) is yours. And keeping records and accounts is relatively straightforward.
- You can have the personal touch. You can often build relationships easier as a local and smaller business. Being a sole trader often means you are the face of your business and can have a more personal approach towards your customers which can result in longer and stronger relationships.
What are the challenges of being a sole trader?
Being a sole trader sounds pretty good right, well it is, but it does have it’s drawbacks which you should strongly consider before you start trading as one:
- The biggest risk you take with being a sole trader is that you are entirely responsible for the success or failure of your business and will be personally and entirely liable for costs, should it fail. If your business has debts or files for bankruptcy, you could be paying the money out of your own pocket. This can happen because there is no difference between the person running the business and the business itself.
- As much as you might enjoy the responsibility and the gratification of doing everything on your own, you might feel differently when times get tough. It is a lot of pressure to run a business on your own, you know that every decision has been yours so there is no one else to blame if things go unfortunately awry.
- You can stretch yourself thin. As a sole trader, you have to be in charge of every aspect of your business from sales to accounts to marketing, which could cause you to work longer hours and struggle to do the best at everything.
- If you don’t work, you don’t get paid. Holidays, sick days, kids days off school. If you work alone, it’s likely that when you aren’t there, the business isn’t trading that day.
- Some banks and businesses are more wary of doing business with sole traders, opting to work with limited companies instead. Without access to grants or loans, it can be difficult to develop your business.