There are so many options to choose from when setting up a new business. Sometimes, you get lost in which one to pick that it holds you back from the important things you need to do to get set up, running and making a profit.
Being a sole trader is a great option for many new businesses. In fact, sole traders made up 60% of small businesses in the UK, with 3.5 million sole traders in 2019.
If you’re thinking of becoming one, we’ve put together a list of the top advantages of being a sole trader to help make up your mind.
What is a sole trader?
First of all, let’s clarify what being a sole trader is.
A sole trader is a business owned by a single person. That means there’s a single person responsible for handling all the decisions, taking responsibility for the company and ultimately keeping all the profits.
They can be funded by their own savings, bank loans or personal loans.
What are the advantages of being a sole trader?
Without further ado, these are the top advantages of being a sole trader.
1. Greater control of your business
Being a sole trader means you have ultimate control of your business. You are your own boss, you make your own decisions and you are responsible for everything that happens.
There’s no need to consult shareholders or directors. You can run your business exactly how you choose.
2. More flexibility
Because you’re the only one making decisions about your business, it’s also easier to adapt to new changes as a sole trader.
If you want to expand your offering, change prices, or adjust your hours, you can do it instantly. There’s no one else that you have to approve these changes by, making it a great option for those who are fitting a business around a busy lifestyle.
3. It’s easy to get started
Setting up as a sole trader is incredibly simple. All you really need to do is inform the HMRC and register as self-employed.
We’ve listed the steps you need to take later on in this article.
4. Low setup costs
One of the main advantages of being a sole trader is that when you set up, you don’t need to pay any fees to form a company with Companies House.
It’s free to register as a sole trader with the HMRC, meaning you can set up a business for nothing. Being a sole trader means you can also use your own savings or personal loans to fund your business as well, meaning more flexibility with your finances.
5. Low cost accounting
The average accountancy costs for businesses can vary. But as a sole trader, this cost tends to be a lot lower than being a limited company, as your accounting process is much simpler.
That’s because sole traders don’t have to fill out formal Annual Accounts or Corporation Tax Returns. However, you will need to maintain records of your invoices, expenses and submit a personal Self-Assessment Tax Return.
If you hire an accountant, you’ll pay much less than a limited company because there’s less work that needs to be done. It’s also much easier to take care of your accounts yourself, cutting that cost entirely.
Need some help with your accounting? Take a look at the best self-employed accounting software that you can use here.
6. Less forms and red tape
Not only do sole traders have less accounting to do, but they also have fewer forms to fill out and red tape to cross.
As a sole trader, you don’t have to file a confirmation statement or any of the other myriad of documents that a limited company may need to do so. Most of this is down to the fact that you won’t need to manage shares of your company or appoint directors – as everything is already under your sole control.
You can find out what legal obligations you have as a sole trader here.
7. Access to tax allowances
Sole traders can claim capital allowances on certain expenses, such as the equipment you might need to operate your business. This can include IT equipment such as a computer, tools and machinery, vehicles or even office furniture.
This tax relief can be a helpful advantage to sole traders, but it is worthing out that limited companies do receive better tax advantages.
8. The profits are all yours
One of the best advantages of being a sole trader is that you get to keep all of the profits that your business makes.
There’s no need to share them with other shareholders or employees, as there are none. It’s just you, and you can reap the reward from all your hard work.
In addition, you might also be able to retain personal ownership of the assets that your business has – giving you extra capital to your name.
9. More privacy
With limited companies, anyone can inspect their published accounts. It’s part of the public record for all to see.
However, sole traders can be kept private. There’s no need to publicly publish any information, which means your finances are kept much more private. This also helps make sure your competitors have less information about your company, giving you an advantage.
In addition, your personal information will also be kept private.
10. No hiring problems
Sole traders don’t have any employees, which means you don’t have to go through the whole process of hiring and managing employees. It also means you don’t have to negotiate payroll and other expenses that come with having employees.
11. It’s easier to change your mind
If you register as a sole trader and decide it’s not right for you, it’s easy to change to a limited company. If you want to change, all you have to do is go through the process of becoming a limited company.
This is great for people who are testing out a new business, as being a sole trader gives you more flexibility to test the waters. As your company grows, or if you choose to expand and potentially even hire more people, you can register as a limited company later on down the line.
It’s not as easy to change from a limited company into a sole trader. To do this, you would have to through a formal process of closing your company before you can register to be a sole trader. If you’re unsure, it’s better to start out as a sole trader first.
What are the disadvantages of being a sole trader?
There are many advantages of being a sole trader, but sadly it’s not for everyone. There are a couple of downsides that you may experience, particularly as you have full control of the company.
This is a great benefit for running the company for how you want, but it also means you’re responsible for any failures or debts that you might acquire. There’s also no one else to rely on if you’re ill or unable to work. You have no employees that will take over, meaning that if you’re unable to work, you’re unable to earn.
Some people will also view sole traders as too small to handle certain jobs, meaning that you might miss out on certain contracts. In addition, if you want to build a business and cash out, this will also be more difficult to do as a sole trader.
How to set up as a sole trader
Setting up your business as a sole trader is simple and easy.
It involves just three easy steps.
- Tell the HMRC that you’re self-employed. This involves just filling out one simple form.
- Choose your business name. If you want to stop others from trading under this name, you might be able to also register for a trademark.
- Register for Self Assessment for your tax and make sure you file them annually.
That’s it. Pretty simply, huh?
Still not sure if being a sole trader is right for you?
Don’t worry, it’s a big decision and you should make sure that you have looked at all the information before you act. To help you decide, we’ve put together this guide comparing being a sole trader to a limited company.
And remember, your decision doesn’t have to be forever. If you register as a sole trader, you can always become a limited company down the line when it suits you better.
Looking for more tips on setting up your business? Check out our ideas and tips here.
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