What is a sole trader?

A Sole Trader is somebody who owns and operates a business, making that person solely responsible for its debts and entitled to all profits. In some parts of the world, people use the term Sole Proprietor.

It is one of the simplest and most common business structures globally.

The sole trader does not have a separate legal entity. This means that the owner and the business are the same, as far as the law is concerned. This has significant implications for taxes, liability, and the way the business operates.

In this context, “liability” refers to legal obligations, such as debts.

The Cambridge Dictionary has the following definition of sole trader:

“A self-employed person (= someone who works for themselves, not for an employer) who owns and runs their business without a business partner or partners.”

Key features of a sole trader

  • Simple setup

Starting a sole trader business is straightforward. It requires minimal paperwork (in most places), making it an attractive option for budding entrepreneurs. It is the cheapest option if you plan to set up a business.

  • Control

As a sole trader, you have complete control over your business. All decisions are yours to make. This autonomy allows for quick decision-making and flexibility, which is an advantage in the business world.

  • Taxes

When completing your personal tax returns, you must include all your business income on the same form if you are a sole trader. Although this simplifies tax preparation, it also means that your business profits are taxed at your personal tax rate.

  • Liability

You are personally liable (responsible) for any debts or lawsuits. If your business struggles to pay its debts, your personal assets, such as your home, vehicles, or life savings, are at risk.

Image of a plumber, electrician and taxi driver - plus the definition of sole trader.
Image created by Market Business News.

Pros and cons to being a sole trader

  • Advantages

Managing the business is relatively simple. You have greater flexibility than other types of businesses. You have direct control over all business decisions.

There is also less bureaucracy and lower startup costs.

  • Disadvantages

If the business gets into financial or legal difficulties, you risk losing your personal assets.
Lenders and venture capitalists perceive more risk with sole traders, which means that you will probably find it harder to secure funding or a loan.

In today’s fiercely competitive marketplace, you will probably have to work long hours. This can result in work-life balance problems.

Conclusion

Being a sole trader is the simplest and least costly path to entrepreneurship. You will have total control of your business. You will also be liable for any commercial debts and legal actions.
For most newcomers, the benefits outweigh the risks. That is why it is such a popular choice.