Advantages and Disadvantages of Being a Sole Trader

Hooray, you want to start a business! But do you want to be a limited company or a sole trader? This blog explores the main advantages and disadvantages of being a sole trader.

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.

Advantages and disadvantages of being a sole trader

Advantages of Being a Sole Trader

1.      Easy to Set Up

It really is straightforward to set up as a sole trader business. You contact HMRC and register as self-employed. 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.      Cheap

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. 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, 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. But 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 for tax!

5.      Easy to run

There are relatively few administrative or recordkeeping requirements compared to a private limited company. 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 2024; find out more from our blog: Making Tax Digital ITSA.

Disadvantages of Being a Sole Trader

1.      Unlimited Liability

Just like it says, your liability is unlimited! 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 and you are one and the same. The protection of a limited company safeguards against this. 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 gest 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! 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, 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 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 <insertlink>.

Reading both articles will help to decide on the best business structure.

Advantages and Disadvantages of being a Sole Trader – 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:

Best accounting software for Self-employed

Bookkeeping for self-employed

What is a sole trader

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