Sole Trader: Definition, Characteristics, Benefits, and Drawbacks

The simplest type of business is the sole trader or sole proprietorship. A business is run by a single individual who has complete control over it. There is no formal legal entity for this company.

Many instances can be found all around you. Plumbers, hairdressers, and gardeners are all examples of people that work in the service industry. They may conduct a seasonal or part-time business.

The majority of their capital comes from their own savings. The owner may be able to borrow money from relatives or friends or obtain a bank loan.

Characteristics of a sole trader

• One individual is the business's owner and is in charge of its money, profits, and operations.

• There is no recognised legal entity for a business.

• The owner's obligations are limitless. If the company fails, the owner may lose his or her personal belongings (personal property).

• When the proprietor passes away, the business may come to an end.

• Corporations are exempt from paying corporate taxes. The owner, on the other hand, simply pays a personal income tax return.

Advantages and disadvantages of being a sole traderAdvantages

• Setting up and running a sole trader is simple and inexpensive. This organisation does not require formal legal entities, financial paperwork, or reports and requires very little cash.

• The firm is under the direct management of the owner. He makes all of the important choices and operates the company as he sees fit. Because it is basic, it enables quick and straightforward decisions such as changing the target market.

• The owner receives all earnings and funds. They are not required to share their business gains with others.

• Compared to other sorts of organisations, businesses have fewer laws and restrictions. Because a lone trader lacks a formal legal body, this is the case.

• The owner is not subject to double taxation. Because there is no company tax, he simply has to pay personal taxes.

• Customers and workers have direct contact with the owner. As a result, the success of the firm is determined by the owner.

• It is also simple to close a business, depending on the owner's desire. If the firm appears to be unprofitable, he has the option to shut it down right away.

Disadvantages

• The owner is solely liable for any losses and debts due to limitless liability. To pay off debts, they may have to sell personal property such as automobiles or residences.

• A sole trader is unable to raise big funds. In most cases, they will borrow money from family and friends or use their own funds. Bank access is similarly limited, and limited companies are unable to issue shares on the Stock Exchange. In order to obtain a loan, owners frequently have limited finances and few assets to use as collateral.

• The quality and talents of the owner have a significant impact on the success of the business. As a result, if the owner passes away, the company may cease to exist. The business may not be as successful if the successor (for example, his child) lacks the same attributes and skills.

• Attracting qualified personnel is difficult for business owners. As a result, there is no defined division of labour or decision-making support.

• A high level of responsibility necessitates the owner's participation in a variety of company responsibilities. This can entail long hours and harsh working circumstances.

Accountants in Croydon help small businesses and startups with their accounting and taxation matters, to keep their business running smoothly.