What are the advantages and disadvantages of being a sole trader?

Operating as a sole trader comes with a variety of advantages and disadvantages all of which you must carefully weigh up before you make a decision as to which trading model is most appropriate for you.

Advantages 

1.      Less admin – Sole trader businesses are easy to set up and involve less administrative duties going forward. You will still have to complete an annual Self Assessment return and pay any VAT due, however, you will not have to worry about corporation tax, confirmation statements, or adhering to the rules laid out in the Companies Act.

2.      Profit is yours – As a sole trader with no shareholders or directors, all profits you make are yours. Although you will have to set a portion of the profits aside to cover your tax obligations, the money will be sent directly to your bank account and is yours to do what you want with.

3.      Personal privacy – As the director of a limited company, a lot of your personal and company information will be in the public domain. This includes your name, year and month of birth, trading address, and even details of your company accounts. As a sole trader, however, all of this information is kept private. 

Disadvantages

1.      Liability – You can be held responsible for the debts of your business. Should your business bank account be unable to keep up with the repayments, you as an individual will be required to use your own funds to clear the debt.

2.      Finance – As a sole trader it can be more challenging to obtain finance to take your business to the next level. Although this may not be an issue for some, if you are planning on expanding your operations in the future, you may wish to consider incorporating as a limited company.

3.      More personal tax – As a sole trader all of the money you take from the company will be treated as income and taxed accordingly. However, as a company director you are able to take a portion of money out as salary, and the rest as dividends from company profits. For many this can be a much more tax efficient way of extracting money from the business.