The world of a sole trader is a pretty unique one because it is an individual adventure of personal business enterprise. Sole trade is considered as the oldest and most commonly used form of business organization. Having an individual business, believe it or not is the dream of some entrepreneurs.
Many would rather have sole ownership and responsibility of their actions when it comes to their business and decision making. A sole trader who can also be referred to as a sole proprietor is a self-employed person who operates a personal business providing services to individuals and families. With sole trading, it becomes easier and possible to have a good service provider relationship with your customers.
It is common to find sole traders like car wash services, mechanics, party planners, day care services, decorators, plasterers, plumbers, hairdressers, small shops, manufacturers, internet entrepreneurs, self-employed consultants and other individual service providers.
Let us just say you are in full control of your business, which means you are your own boss and can develop it exactly as you choose and also make changes to the business to adapt to changing circumstances for example, changing your pricing structure, deducting products and services, adding new products and services and many more changes.
This ability to make swift decisions and implement them quickly can be a key advantage for a sole trading in a competitive, quickly changing market.
This type of business enterprise is easy to form with all capital sourcing on the shoulders of the owner but does not necessarily have to be a big capital, a sole trader can decide to start small. He makes all the investments and controls the business himself. Stability and continuity of the firm is totally depended upon efficiency and capacity of a sole trader because it develops the improvement capacity of any business and also protects from the unnecessary materials.
They do not have legal identity that is separate to its owner which means the sole trader’s identity is the business’s identity (there is no legal distinction between the individual and their business entity). You get to have total control over profits after paying tax, your business, your assets and you are personally liable for all your business debts.
The fact that it is a sole ownership of a business does not mean they need to be alone in the business. An important consideration is whether or not to hire employees, this depends on the amount of labour that would be needed in the course of providing the customers with a satisfactory service.
They can decide to employ staffs to help manage and work with them on which could be on a part-time basis. Some sole traders may choose not to employ anyone, to help them keep costs low and maximize profits available to them. While employee salaries would take money from the business and might make you loose on the expected profit, having employees around can help you limit the time you have to put into the day to day operations of the business.
With this, there is an opportunity to create employment where necessary. Through employment, the sole trader creates an effective chain of like growth enhancement, productivity, labour facility and high sales. There are some advantages to having sole ownership of your business, this can pose as a challenging task have to bare a lot on your shoulder. There are lots of process that always goes into establishing a sole business like any other business which includes:
- Discover the idea about the business
- Finding suitable premises from which to operate. If you choose to operate from home, depending on the circumstances you may need to consider whether your rental agreement permits it, any alterations that may be necessary (and planning permission required) and whether you’ll need to pay business rates to your local authority for the use of part of your home for business purposes.
- You need a business insurance.
- Depending on the type of business, you may likely need much capital than you had planned to operate the business in the early days. Potential investors do not easily invest in sole trading business investment because they cannot be offered shares within the business.
- If you are going to employ people then you know you will be registering a Pay As You Earn (PAYE) payroll scheme, statutory pension entitlements, create an employment contracts and other employment-related matters.
- Unless you know much about accounting, you will be needing the service of an accountant who will be responsible for keeping track of the books in your day to day operations. This includes keeping track of if you made profit and loss, the purchases you made, sales and payroll for employee pay-outs (if you end up employing). This can be time consuming if you take it up yourself while running other aspects of your business.
So we are here to show you what this business is about, along with the pros and cons.
The pros of sole trading
Unlike other businesses where you need to follow multiple protocols to begin or even establish a name. Finance is usually not an issue, because a sole trader can decide to start small. Capital can be gotten from sources like loans from financial institutions, Personal savings, then from family and friends. Raising capital can be a huge struggle since they do not have to submit annual accounts (reduced financial transparency).
Because of this, the ability to get bank loans are reduced. Anyone can decide to inspect a limited company’s published accounts, but it is not the same with a sole trader’s financial information which is sealed and kept private. This way, competitors have less information on your company’s secrets and success.
Speaking of names, do you know that your business can be named after you? Interesting right? If you decide to trade under another name other than your very own name, you still have to follow certain rules around naming your business which means that your business name cannot be the same as another business, contain offensive or sensitive words.
In sole trading, you can start your business first without having to choose a name, open a business account, publish an office address or provide details of people with significant control over the business. It is always best to keep a bank account for the business separate from your personal accounts.
Maintaining an accounting record will help you keep a steady track of how much you put into it and if it is yielding profit according to standard accounting practice, giving a true and fair picture of the business but this does not mean you will need to maintain accounts in a specific form or structure. You will need to keep good records of your sales and expenses incurred.
Owning this type of business would only require Self-Assessment tax return and not require much need to generate any annual business reports, paper work or even regular annual filings to Companies House. These will help during your annual self-assessment tax return. Some countries require some necessary task registration as a sole trader.
So, depending on the country of operation, you will need to register with HM Revenue and Customs (HMRC). It can easily be done online with little stress. Sole traders have more privacy in terms of their business dealings compared to limited companies.
As a sole trader you have the right to retain all the profits gotten from the business, without having to share them with other shareholders. Sole traders can easily convert their company to a limited company relatively if they do decide to adopt an official business structure and if you do decide to end sole trading, there is no paperwork involved with ending unlike the limited company which could be more difficult taking time and energy. It requires minimum legal formalities required.
The cons of sole trading
Sole traders are personally liable for any accumulated business debts, if the business gets into financial difficulty. This means that all debts owed by the sole trader will have to be sorted out of the business account and if the funds in the account are not enough, the payment will have to be made out of their personal assets (home, land, cars etc.).
Such person is at a risk of bankruptcy. The different between a LLC and a sole trader’s establishment is Marketing credibility. People often consider sole trading as non-professional entities, and this may be due to the perception is that sole traders have unregistered status.
The topic of trust also come into consideration from potential customers, investors and banks in case of loans for start-ups. It is believed that big business are more reliable and trustworthy because they have the resources they need, infrastructure that will be required for the service and the willingness to get things done on time, should something go wrong while supplying their products of services.
Before going into this type of business, you will really need to do your research into your market and consider your potential customers to see whether you will be able to work as a sole trader or not.
Banks prefer accounting transparency that comes with a limited company than a sole trader so they may be unwilling to lend out large sums of money to sole traders. In the case of continuity, it is difficult to expect continuity and maintenance with sole trading especially if the owner dies, falls sick and is unable to attend to business or is even involved in an accident. Due to the fact that the family might not share the same vision as the owner or even have any idea of how to maintain it, they may end up selling off the company.
There is no one to be accountability to asides yourself or even collectively shared ideas and experience. So in a situation where you make a decision that may affect your business, you end up taking it alone which may be harmful to everything you have worked for.
Just remember that as sweet as it is to run this type of business, the work easily all falls on one person. It can therefore be nearly impossible to take holidays or even sick leave leaving little for family, friends hangout or a having social life outside work because of fear of disappointing costumers.
Many people employ the services of a formation agent which is usually the best if you want to be at the top of your game. Some people usually think that because they are going into a small setup, they do not require the services of professional advice. How more can you look professional without the aid of a professional touch? That is why we have capable hands like SURE FORMATION to cover your stress and give your business the boost it deserves.
