Sole traders are self-employed individuals who run their businesses on their own. A sole proprietorship is one of the most popular types of business structure because it is easy to start and requires minimal paperwork.
There are many benefits of being a sole proprietor, and one of them is the freedom to do whatever you want. However, being a sole trader can also be challenging and overwhelming because you have to shoulder all the responsibilities alone. To survive as a sole trader, you need to know and implement these basic tips that will be beneficial to your business.
With this article, we are going to explore the pros and cons of running a business as a sole trader and the best practices to follow to survive.
Sole trader advantages and disadvantages
being self-employed has its cons and pros. Every business starts as a small business because it is the simplest business structure. Here, we will look at the advantages and disadvantages of being a sole trader.
Advantages
There are many benefits to being a sole proprietor, and here are the most crucial benefits of sole trading:
- Easy to Establish: It is relatively cheap and easy to establish a sole proprietorship. Registration is easy as long as you are the owner and you are in control of the operation. To get started as a sole trader, you must register your business name and obtain the required permits and licenses.
- You are in total control: as a solo entrepreneur, you have total control over your business. You can have to depend on shareholders or legal partners to make decisions. You make all the calls, implement strategies as you wish, and go in whatever direction you wish to grow.
- Flexible Work Hours: since you are in charge, you can decide your working hours. You can work at your own convenient time without any fear or worry.
- Financially Rewarding: self-employment allows you to make more money. Also, because there is no other person to share the profits with, everything you make as a sole trader after taxes and expenses is yours to keep.
- Tax Savings: as a solo entrepreneur, you are eligible for tax deductions. Many costs acquired can be classified as business expenses, which can be claimed as tax. These expenses can include insurance, marketing, new equipment, etc. Since your business isn’t incorporated, you don’t need to submit annual accounts with Companies House or pay corporation tax. As a sole trader, all you need to submit and pay is the Self-Assessment Tax Return annually. It is advisable to consult a tax consultant to guide you on the dos and don’ts of self-employment tax.
- Total Privacy: unlike a limited company’s annual accounts available for anyone on the Companies House website, a sole proprietorship business’s financial information isn’t available to the public.
Disadvantages
Although sole proprietorship has many benefits, it also has its downsides. Here are some of the disadvantages of sole proprietorship:
- Irregular Income: unlike working and earning a salary, solo entrepreneurs have no guarantee of a stable income. Sometimes, things may not go as planned, and there is a possibility of income becoming unreliable or not enough.
- Sole Responsibility and Liability: as a sole trader, you are responsible and accountable for everything that happens in your business. You are liable to pay contractors, honouring debts, paying taxes and insurance and any legal emergencies. Suppose your business gets sued for malpractice or bankruptcy. In that case, it can affect your personal assets, such as your home and car, to cover the expenses.
- Potential Credibility Issues: a sole trader business does not have the same prestige as a limited company. This can affect the kind of clients you attract and your ability to get loans.
- Difficulty Rasing Funds: banks often hesitate to issue credit for sole proprietorship due to its personal liability. It is also more difficult for a sole trader to get buy-in from investors as the company is not designed to have shareholders.
- Sale Limitations: It is more difficult to sell your business or pass it on as a sole trader after you retire than as a limited company. Not being legally separated from the owner makes things more complicated; therefore, you will need to organise a transfer of assets to the new owner.
Survival Tips for Sole Traders
To be a successful solo entrepreneur, you need the right mindset, motivation and practices on your journey to build the business of your dreams. Below are some tips and practices that you need to follow:
- Never Get Tired of Planning: as a sole trader, you are in charge of a lot of responsibilities, and it can get overwhelming. To keep up with everything, you need to plan- make plans and stick to them. Use a to-do list or day planners to make working easier for you.
- Learn to Manage Your Time: learning to manage your time is more important if you are a solo entrepreneur. You have to be selfish with your time when needed. An appointment diary or a calendar can greatly help with time management.
- Associate with other Sole Traders: self-employment can be lonely and isolated, so you need to put yourself out there by associating and collaborating with other solo entrepreneurs. This will provide you with the support you need and give you access to learning new things and new opportunities. Attend small business networking events and tradeshows in your industry to meet people of like mind.
- Have a Separate Business Account: Managing finances as a sole trader is crucial to the success of your business. Opening a separate business account is one of the key steps to managing your finances as a sole trader. Opening a business account will make tracking your business expenses, calculating profits, and paying taxes easier.
- Consider Tax and VAT: as a sole trader, you must keep a record of your business’s sales and expenses; you can do this by sending a self-assessment tax return every year and paying income tax on profits. Even if you have no profit in your first year, you must declare your income and expenses on a tax return.
- Get Sole Trader Insurance: obtaining a sole proprietorship insurance policy should be one of your top priorities. This way, you will be able to protect yourself from the risks you can face as a business owner.
- Pay Yourself a Salary: make it a habit to pay yourself a salary; this can be monthly or quarterly. This way, you won’t take money out of your business on an ad hoc basis. Doing this will help with cash flow management and future budgeting.
Invest in Branding Your Business: investing in a brand identity that corresponds with your value and how your audience perceives you is crucial to your business’ success. You must be intentional with your business name, logo, website and online presence because you’re building the face of your brand.
