A sole trader also known as a sole proprietor is a type of business structure. It is a business that is owned by a single person and he/she has complete control of it and how it operates. They own the profits the business makes and its assets.
However, a sole trader is also responsible for liabilities and debts the business accrues. Most people tend to believe that being a sole trader is the least expensive option when setting up a new business.
It is only natural for people to want to be their own boss and shape their own destiny, but it also has its practical realities as portrayed in the disadvantages listed below.
Benefits Of Being A Sole Trader
There are certain benefits that are associated with being a sole trader, the main ones include the following:
Sole traders are able to make and act on decisions much faster because they are not required to consult other decision makers. This will allow them to provide for client needs in a timely manner. Sole traders decide whether or not to undertake work and where the business is heading.
Sole traders often run small businesses offer personalized services with local ties or roots. It is a business aspect that can be very appealing to any potential client from the local community. This is because they are closer to customers and this translates to better customer service.
A sole trader’s information remains private and confidential unlike in limited companies where it must be made public following registration.
A sole trader does not have to share the profits he/she makes with anyone unless they want to.
Sole traders have the benefit of maintaining complete control of the business they operate. This allows them to do as they please without any form of interference.
The business of sole traders attract significantly lower accounting costs. Accountants charge much less for advice and company accounts because they are associated with minimal workloads.
Sole traders are not required to complete the numerous forms that limited companies do. Annual accounts assist in the preparation of annual assessment tax returns whereby tax liability and annual profits are declared.
Being a sole trader also has its limitations or downsides as explained below:
Every decision made in a sole trader business must be by the individual himself. This means that there is no opportunity for the input or help of other people. Ultimately, failure or success of the business is up to a single person.
Economies of scale
Unlike larger corporations and limited companies that can purchase in bulk, sole traders are unable to capitalize on economies of scale. The direct effect of this is higher rates or prices for services and commodities.
Raising funds to pump into their businesses is a major challenge to sole traders. This minimizes or completely eliminates the possibilities of raising funds to fuel expansion plans.
The law fails to view sole traders as separate entities thus subjected to and suffer unlimited liability. If the business accrues debts, then liability rests with the owner and it might mean they risk their assets such as personal savings and home.
Inability to work
If a business owner is involved in accident or is unwell to the point they cannot work then the business operations come to a sudden halt. This could result in major losses for the business.
Small company perception
Sole traders may at times find it difficult to get work. This is because some large companies may shy away from working with business that have a single employee. Furthermore, following up on things such as tenders is time consuming and might not pan out.
Sole traders do not enjoy the famous perpetual succession, instead assets are dealt with according to sole trader’s estate plan.
This is major challenge because of non-existent employees. Any day that is taken off can mean incurring losses.
Also published on Medium.