Sole Trader Advantages and Disadvantages
Starting up a business as a sole trader is an attractive option for many entrepreneurs. There are many advantages to being a sole trader, not least of which is the relative ease and affordability of setting up the business.
However, there are also some disadvantages associated with running a business as a sole trader. In this article, we will explore both the advantages and disadvantages of being a sole trader and help you decide whether it’s the right choice for you.
Knowing the best business structure is hard; we also have a blog about limited companies, so you can get a good overview of both before you decide – advantages and disadvantages of a limited company.
What is a Sole Trader?
A sole trader is a type of business structure where a single individual owns and operates the entire business. The sole owner is personally responsible for all aspects of the business, ranging from financial obligations to customer service.
As a sole trader, you have control over all decisions regarding the business, and they can also hire contractors or employees as needed.
Sole Trader Advantages
1. Easy to Set Up
It really is straightforward to set up a sole trader business. You contact HMRC and register as self-employed. HMRC will provide a unique tax reference number and a self-assessment tax return each year.
You may also wish to look into what insurance is relevant for your work; it is sensible to usually get professional indemnity insurance. And check with the ICO (Information Commissioners Office) about whether you need to register and pay your data protection fee. These processes are straightforward, though.
2. Cheaper to Setup
As above, there are few initial start-up costs, and as it is just you, there are no wages to worry about in the beginning and no real need to get an expensive logo or branding done. Limited Companies have to pay a fee to Companies House to register.
When you start, just start! Having a plan is great, but don’t overthink it. You can do all the social media account setups yourself and have a basic cloud accounting system; many have free or very affordable versions.
You usually don’t need a website or expensive top-of-the-range IT equipment. Obviously, it does depend on what you are going to be doing, as you may need specialist equipment to carry out a service!
3. Full Control Over Everything
It is just you; you call the shots and make the decisions as a sole trader, with no directors to answer to, and no one to argue with about changing the marketing message or branding colours.
4. You Keep All the Profits
Unlike a limited company, the money is yours. You can take money out of the business and spend it on what you like. It is sensible to keep the account separate and make it clear when you transfer payments to yourself.
Ultimately, you have every right to the money you make, and no obligation to invest back into the business and no need to share it with anyone else. Although obviously, you must pay any business outgoings and put money aside to pay income tax and National Insurance!
With a Limited Company, you pay Corporation tax on the profits you make. This is a separate rate of tax from personal taxes and is based on the company’s annual profits.
5. Easy to run
There are relatively few administrative or recordkeeping requirements compared to a private limited company business structure. Basic accounts are the only real necessity by law. The list of records you need to keep as a limited company is quite long, and you can get fined if you don’t follow the rules! You are, of course, responsible for your self-assessment tax return. This can be reasonably straightforward, but an accountant or bookkeeper can be hired if you wish.
With the introduction of MTD (Making Tax Digital), all businesses must supply online tax records from April 2026; find out more from our blog: Making Tax Digital ITSA.
Sole Trader Disadvantages
1. Unlimited Liability
Just like it says, you have unlimited liability! Unlike a limited company (the clue is in the name), you are responsible for all debts the business accrues. This can spell bad news if your business goes downhill.
Your personal assets are going to be vulnerable, as the business there is no legal distinction between you and the business. The protection of a limited company safeguards against this as it is a separate legal entity. So, the level of risk involved in your business needs to be assessed.
As for liability for accidents or losses, if you get a comprehensive insurance policy, you can protect against this, but it would be you that gets sued, not the business.
2. Difficult to Raise Capital
Banks are less likely to lend to a sole trader, as essentially they are lending the money to you, not the business. It may also affect grants or loans available from various sources, such as angel investors. Sole traders, therefore, rely on their own financial backing.
3. The Burden of Decision Making
As well as an advantage, it can be a disadvantage as all the decisions need to be made by YOU. That can be pretty exhausting and overwhelming if you have to make decisions on the future of your business or which direction to take. You may well have a support network, but ultimately the responsibility lies with you and you alone.
4. Lack of Continuity
It can be really hard to have time off as a sole trader! If you are in charge and you do most of, if not all, the work, the time off can mean the business stops. As you grow, you may develop a team that can take the strain, but it is likely just to be you at least at the start and as we’ve said, as a business owner, you are where the buck stops, so if mistakes are made or problems occur, you may well be needed to get involved, even from your holiday villa.
5. More Difficult to Work with Some Businesses
Not every business will deal with sole traders. It might sound ridiculous that it makes such a difference, but larger companies may only wish to deal with a limited company as the perception is of stability. You can, in fact, give the impression that you are larger than you are, whereas a sole trader is simply that.
There can also be insurance considerations in some industries. If you want to work with large corporations and want to be taken seriously, you need to consider the limited company route from the off.
So, there you have it, 5 reasons why to be a sole trader and 5 reasons why not to be! The decision of the business structure is ultimately yours and will depend on your business type and circumstances. You may also be interested in our other blog, the 5 advantages and disadvantages of having a limited company.
Reading both articles will help to decide on the best business structure.
Sole Trader FAQ
What Taxes Do I Pay as Self-Employed
You will complete a self-assessment tax return each year. As part of the process, a tax calculation is made, which works out the amount of tax you need to pay or reclaim. You will also be assessed for any National Insurance contributions due.
Do I still get a Personal Allowance for Tax?
Yes, you will still receive your tax-free personal allowance and you will pay tax on anything over this. The personal allowance is taken into account when the tax calculation is completed as part of your self-employed tax return.
Can I change from a Sole Trader to a Limited Company?
As a sole trader, you might find that as the business grows, it is more tax efficient to run as a limited company. You can then set up a Limited Company at Companies House and let HMRC know that you have ceased as a sole trader.
It is easier to change from a sole trader to a limited company than the other way around.
Do I need to Register at the Companies House Website?
No, only companies with a business structure of a limited company register at Companies House. Sole traders must register as self-employed with HMRC.
Sole Traders Advantages And Disadvantages – Related Articles
If you are thinking of setting up as a sole trader, here are some other articles and resources that you might find helpful for running your own business:
