Sole Trader Information

This type of business is operated by an individual that wants to be a 'one man band' and completely responsible for every aspect of running the business. This provides the individual with the freedom to make decisions on the way the business is conducted without reference to anyone else. It may be argued that a sole trader can seize opportunity the minute it appears without permission from partners or business colleagues and thus gain a market advantage. In addition any assets built up in the business belong completely to the owner. This arrangement can suit the lifestyle and character of many people as it is also the least formal in respect of compliance with government requirement for paperwork to be completed.

Another point to consider is closing the business. It is relatively easy to wind up a sole trader business than that of a registered company. Therefore if you are unsure that the venture will succeed it may be preferable to start off by operating the company as a Sole Trader.

However, the downside of being a sole trader can be considerable.

The following potential problem areas either by themselves or cumulatively lead many business proprietors to move away from sole trader status:

1) Complete responsibility for all the debts of the business

2) Potential liabilities may increase the debts of the business, for example, a successful claim for damages may increase the business debt and be a cause of bankruptcy. To loose property and other assets that took many years of hard work to accumulate can be heartbreaking for the individual and their family and with the law supporting the creation of the 'Blame and claim' culture this scenario is becoming more common. Especially vulnerable are those engaged in industries where public and workers can be at risk and able to sue if the letter of the law was not imposed in the workplace.

3) The accounts of a sole trader are confidential to the individual and therefore not a matter of record that can be publicly inspected. This may make it difficult to contract with public sector organisations who demand a degree of transparency in their business contracts with the private sector.

4) The tax regime is particularly unfriendly as tax can be charged all the way up to the maximum rate (40% for tax year 2004-2005). Many sole traders make the mistake of believing that they will only be taxed on the amount of drawings they make on the business. However, this is not the case. Tax is charged on the amount of net profit left after deducting allowable expenses (NOT all expenses are tax deductible).

5) Are holidays or time off in emergencies an option? Can you afford to be away from work without causing loss or irreparable damage to the business? So do you need a partner or in the case of a registered company a co-director that will be as equally committed to the business as you.