What is a sole trading business?

Being your own boss by running a business solely can be extremely rewarding yet it comes with its own challenges. In this article, we explore the basics of sole trading, what it takes to be one, including the advantages and disadvantages. Let’s dive in!

Who is a sole trader?

A sole trader is a person who runs a business solely for and by himself/herself. Sole traders are often referred to as the business as there is no legal separation between the owner and the business. 

As a sole trader, you have absolute control over your business. This means all profits after tax, assets, and debts are totally yours and every decision on how to start and run the business depends solely on you. You are the master, controller, organizer, and manager of the business with all power vested on you to run the business as you deem fit. 

Therefore, sole trading is considered the oldest, simplest, and most versatile form of business. It’s not surprising it’s also one of the most popular forms of business especially among contractors, consultants, freelancers, and many more

What are the characteristics of a sole trading business?

  • As earlier said, the sole trader and the business are only one entity. The sole trader sees no need to register the business with another trade name. They do business under their own names. Hence, if the owner dies, the business also dies. 
  • The proprietorship has no legal existence apart from the proprietor himself. The loss of the sole proprietorship is the loss of the owner. The profit of the proprietorship as well is his. 
  • It is free of government involvement and regulations and it can be started without performing any legal formalities. Therefore, it can be established and dissolved easily. 
  • In the sole trading, liability is unlimited. Hence, a sole trader is liable for the business debts which is not only limited to its investments but including his private assets and properties. 
  • There are no shareholders in sole trading and the owner raise raises capital all by himself. This makes the funding of the business to be limited. 
  • A sole trader is an all in all. He makes all the investments and takes all the risks and profits through Demat and trading accounts. If the business succeeds, he succeeds. If the business fails, he fails. 

What are the advantages of a sole trading business?

  • You have total control over your business with no government interference. Besides, you are not accountable to any shareholders and you don’t need to make compromises for anyone. You run your business as you want.
  • Since you are the only decision-maker, decision-making and execution of plans will be fast, easy, and hassle-free. 
  • Sole trading offers flexibility which can create room for company growth as there are no restrictions. 
  • Setting up a sole trading business is lower as you might only need a small capital to get started although that depends on the type of business you want to venture into. 
  • You are not paying any fees to the company house and you do not need to file accounts with them. This means you have fewer statutory responsibilities than a limited company and you don’t need to go through the hassle of heavy paperwork. 

What are the disadvantages of a sole trading business?

  • Being an unlimited liability, a sole trader is liable to organizations’ debt. Your personal properties, cars, or any other assets are at the mercy of people who could sold them off to pay business debts. 
  • There are limited funding opportunities especially with those established entities such as issuing shares or obtaining loans from banks. 
  • Business continuity ends with the death of the owner.
  • Because the business is owned and directed by the owner, it doesn’t hold as much prestige as a limited company. Hence, recruitment agencies and the best talents in the industry might not find working with sole traders attractive. 
  • Having to run a business on your own comes with heavy workloads and responsibilities. Sometimes, the going can get toughs and this is one of the main reasons many soke trading businesses backed up when they couldn’t bear it any longer. 

Final thoughts

Should you become a sole trader? Well. the decision to become one depends on you. But with the increased advocacy for self-employment, this can be the smart and simple way to get started in building your empire. However, understand that a lot lies heavily on your shoulder and it can get very difficult at times. 

The good news is this is where many limited liability companies(LLC) and corporations started. As the business grows and expands, they restructured the business from sole trading to LLC in order to accommodate the growth. 

Therefore, with hard work, discipline, and adequate knowledge of business management, you can climb the success ladder in no time. 

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