What is a Sole Trader Business?
A Sole Trader Business, in simplest terms, is a business that has a sole trader – commonly also known as a sole proprietor – or someone self-employed and responsible for all aspects of the business. These responsibilities include but are not limited to all hiring and firing, any debt and liabilities, and all day-to-day business decisions. In other words, the sole trader is the business, and the business is the sole trader.
According to the SBA, or the U.S. Small Business Administration, “a sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities”.
There are many different responsibilities a sole trader, or sole proprietor, must take on when it comes to running a sole trader business, and these responsibilities differ by country.
As a sole trader in the United Kingdom, they are required by law to:
- Keep records of all business expenses and sales
- Send a filled-out Self Assessment tax return to the government every year
- Pay income tax on all business profits
- Register for VAT if the business’ turnover is over ￡85,000
- If they work in the construction industry, the sole trader business must be registered with HMRC for the Construction Industry Scheme (CIS)
Johnathan Korchak, Director of Operations at “inform direct”, elaborates on the sole trader business model stating, “The sole trader business model can be used by many types of business, but is perhaps most popular among tradesmen providing services to individuals and families. So it’s common to find plumbers, decorators, plasterers, hairdressers, and other individual providers of specialist services operating as sole traders. But you might also find other types of business operating as sole traders, from small shops and manufacturers to internet entrepreneurs and self-employed consultants”.
Further elaborating, Jonathan points out that, unlike other standard businesses, a sole trader business needs to register with Companies House or make ongoing filings with them. Just as there are no directors, managers, or officers, there are no shareholders for investing capital, there are only the funds the sole trader personally raised. This point brings it back to the idea that the sole trader is the business, and while that is true, it is still essential to manage company assets separately. For example, having a separate personal bank account and business account.
Advantages vs. Disadvantages of a Sole Trader Business
As with any business model, there are many advantages and disadvantages to sole trader businesses and should be carefully considered.
- A sole trader business is an inexpensive and easy business structure to form and operate.
- Once again, the sole trader is the business and thus has full control over all assets, big picture, and day-to-day decisions.
- Taxation and filling out tax documents is generally quite simple because income earned by the business is income earned by the sole trader.
- A sole trader business can easily change to a different business structure if desired or needed. #
- Because the sole trader is the business and thus is responsible for all debt and liability, any business risk is extended to the sole trader and all personal assets are at risk should something go wrong.
- It is challenging to raise business funds as a sole trader because there are no investors or business partners.
- Sole trader businesses rarely survive after the death or incapacity of the sole trader and thus lose all value when the sole trader is removed from the business.
Examples of Common Sole Trader Businesses
- Freelance Graphic Designers
- Tutoring Services
- Petrol Stations
- Corner Grocery Shops
- Individually-owned Barber Shops
- Freelance Artists
“A sole proprietor is someone who owns an unincorporated business by themselves. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation”.
Government of Western Australia
“A sole trader is the simplest form of business structure and is relatively easy and inexpensive to set up. As a sole trader, you will be legally responsible for all aspects of the business. You’ll generally make all the decisions about starting and running your business, and you can employ people”.
“If you’re a sole trader, you run your own business as an individual and are self-employed. You can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business”.
“A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business”.
“A business that legally has no separate existence from its owner. Income and losses are taxed on the individual’s income tax return. The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner, or it can do business under a fictitious name, such as Nancy’s Nail Salon. The fictitious name is simply a trade name–it does not create a legal entity separate from the sole proprietor owner”
Other useful links from our knowledge centre:
Running a Business from Home
Why Do Businesses Need Finance?
Who Pays Business Rates?
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