Disadvantages of Being a Sole Trader

Whilst a popular business structure, sole trader status holds some disadvantagesWhen starting a new business, setting up as a sole trader is a popular business structure, as the start-up costs are low and operations fairly simple. Accountancy fees are lower for sole traders and accounting duties less onerous. However, as with all business structures, there will be pros and cons to each. There are of course some disadvantages of being a sole trader.

Unlimited debt liability – one of the main disadvantages of being a sole trader has to be the fact that any debt accrued by the business becomes the responsibility of the sole trader. Just as a sole trader is entitled to all the profits made (after tax), they are also responsible for all monies owed. There is no distinction between personal or business assets, so in the event of any company debt, possessions such as private vehicles or even the home, if owned, can be pursued by creditors.

Challenges when seeking funding – raising capital for sole trader status businesses is not always easy. Generally, the life of a sole trader business can be limited, and the more flexible approach to work life balance associated with this type of trading can be off-putting for potential investors or banks, which can stifle business growth. However, there are many grants available in the UK specifically for sole traders, that are worth considering as they don’t always have to be paid back.

Restrictions on scaling up – limited companies can often benefit from the economies of scale associated with bulk-buying of goods or services. Sole traders are limited in this area and so may have their custom affected as a result, due to higher prices being charged. On the other side of the coin, with lower operating costs and overheads, sole traders can still be competitive.

Lack of employment perks – running a business as a sole trader means sole responsibility for all business decisions, no holiday or sick pay. The success of failure of the business rests entirely on the shoulders of the sole trader: it takes a self-motivated individual to make a go of a business run under this structure. The flip side is that holidays can be taken without approval or consideration for fellow colleagues, as long as customer obligations can still be met.

Whilst there are disadvantages of being a sole trader, it’s a great way to start out with minimal start-up costs and no red tape, so the business can be agile and make quick decisions to capitalise on any opportunities that arise. Anyone thinking of starting a business and looking for advice on business structures or accountants for sole traders should get in touch in 01827 54944.