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Are there disadvantages of sole trader businesses? 

  • 3 min read
  • Last updated 31 Jan 2023

So you’ve decided to work for yourself? Great! But now you’re stuck wondering what it means to set up as a sole trader. Are there any disadvantages to sole trader businesses instead of a limited company, you ask? Let’s have a look! 👇

First of all, what exactly is a sole trader business?

A sole trader is someone who is self-employed. You’re responsible for owning and managing your business. 

Some occupations that can be sole traders are:

  • Tradespeople (plumbers, electricians)
  • Freelancers (graphic designers, photographers)
  • Independent contractors (Uber/delivery drivers, tutors)

Basically, as a sole trader, you and your business are one, which makes it different from a limited company.

Limited company

A limited company is a type of business structure that makes a company *legally* separate from its owners. So business and personal finances do not mix, and owners are not personally responsible for any company debts (unlike sole traders).

Whilst sole traders have to pay income tax and national insurance on their profits, limited companies pay corporation tax (and VAT if profits are over £85,000 a year).

For a full breakdown of the differences between a sole trader and a limited company, read our guide here.

OK, so what are the disadvantages to sole trader businesses?

1. You’re responsible for making all business decisions

As a sole trader business, you’re in charge of the day-to-day management of the business – how many clients you take on, how much you’re earning etc. This also means you have to solely deal with any problems that arise, including demanding clients or even legal issues.

2. You have unlimited liability

What this means is that if your business runs into financial difficulties (e.g. if you take out a business loan and can’t afford to pay it back) your personal possessions are also at risk. 🫣

This could be a car, any savings you have or even your home. Remember, if you’re a sole trader, you and your business are one

3. Income isn’t guaranteed 

As a sole trader, if you don’t work, you don’t get paid (it’s not for the weak 😅).

This could make it difficult to plan holidays, or even take days off when you’re ill. On the other hand, if you set your business up as a limited company, your earnings are a bit more secure as you could pay yourself a wage. You’d do this by setting up a PAYE scheme for yourself.

So… are there any advantages to a sole trader business?

Of course! While some aspects of being a sole trader give you lemons ​​🍋, there’s still a lot of lemonade to be made, folks. 

Here are just a few of the reasons why you should consider setting up as a sole trader:

1. All remaining profits belong to you… and you only

As a sole trader, your unlimited responsibility for your business also equals full access to profits. You won’t have to share your profits with any members of your organisation… because you are the only member. 🤑

2. Much less paperwork is required

All limited companies have to register with Companies House and report their accounts on a yearly basis. This information is then made public. 

And on top of that, limited companies still have to file a corporate tax return…

On the other hand, if you’ve chosen to become a sole trader, all you’ll have to do is register as self-employed with HMRC and pay tax through an annual Self Assessment tax return

If that’s too much hassle for you though, give our online tax return service a whirl! We’ll get your tax return sorted and sent to HMRC on your behalf, in no time at all. 

3. It costs nothing to register as a sole trader

If you’ve already cashed out on any tools you may need to get your business up and running, then you probably won’t fancy spending an extra £13 to register your business

If you choose to set up a limited company, you’ll have to pay the £13 to register, providing you’re not earning the £85k a year threshold that gives you no other choice than to set up as a limited company. 😅

Luckily, registering as a sole trader is free. ✅

I’m a sole trader and need help with tax!

Whether it’s tax advice you need or you just want someone to file your taxes on your behalf, if you’re a sole trader, TaxScouts can help! Learn more about our services here.

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