Pros and cons of being a sole trader

What is a sole trader

A sole trader is a person who starts and runs a business, enjoying its profits but also being liable for its debts, taxes, expenses, and losses. While the structure isn’t suitable for everyone, sole trading benefits many entrepreneurs. Sole trading is easy to establish, straightforward and involves fewer procedural steps than other business entities. 

Sole trading has advantages and disadvantages that require you to know them, especially regarding personal liability.

Pros of being a sole trader

As a sole trader, you have complete control over the business and all its undertakings and decision-making. Sole trading has several advantages.

Easy to establish

Unlike other business entities like limited liability corporations (LLCs), sole trading is much easier to establish. For instance, you would only have to complete a little paperwork when starting a sole proprietorship. Moreover, it only involves a few processes and protocols during its setup. 

Business entities like LLCs need you to register with the state government before launching. On the other hand, you don’t have to register your sole trading business with the state as it becomes an individual business entity. It saves you the time and hassle of following up with legal procedures. However, depending on your local or state’s requirements, you’ll have to acquire a business permit or license. There are also options such as offshore LLCs that you can explore as well.

Fewer business fees

You can have a tight budget when starting up a business. However, as a sole trader, you can save on registration charges. LLCs and other business structures require registration charges, and some states might ask for yearly fees for registration maintenance. Sole trading can help you save on costs as it doesn’t have similar legal requirements to LLCs.

Little or no oversight

A sole trader has more freedom compared to other business entities. Sole traders don’t have to file reports indicating up-to-date aspects like changes in staff or management. Moreover, they aren’t required to submit audits, which also have associated fees. Unlike other business structures that require one to comply with the state’s reporting requirements, sole traders have complete control over the business. For instance, sole traders have total control over finances, decisions, and any other business aspect, unlike other entities that have to hold meetings. 

Straightforward banking

Sole trading involves simplified banking techniques that don’t require business checking accounts. Therefore, you have the clearance to accept or make business payments straight from your personal accounts, eliminating the need for a business checking account. However, maintaining clear and organized records to distinguish between personal and business spending is crucial.

Cons of being a sole trader

By eliminating state registration, sole traders lack protection from legal action. Therefore, their personal assets might be taken by debt collectors to settle business debts.

No liability protection

Lack of liability protection is one of the significant cons of being a sole trader. Sole traders don’t get the benefits of owning a legal business entity because they don’t register with the state. The state considers sole traders self-employed, hence being on their own regarding their business operations and transactions. Therefore, a sole trader remains liable for the business’s legal, tax, or financial problems as they lack the legal protections relating to business incorporation. 

Unlimited liability is another major drawback of sole trading. Unlimited liability refers to liability that’s not bound by a contract or law. Hence, the proprietor’s assets can be used to pay the business’s debts. The unlimited liability of sole traders allows lenders, customers, vendors, or debt collectors to access your personal assets to satisfy your business’s obligations.

Difficulty getting financing or credit

Getting financing or securing loans as a sole trader can be more demanding. Most banks prefer working with established firms due to their higher revenues and good credit scores. Sole traders lack business accounts and cards, making it more challenging to build business credit relationships. Moreover, the backing for sole trading comes from one investor. Hence, the business relies on one person’s initial finances, credit history, and investments.

Hard to sell the business

Sole trading is naturally tied to an individual, making it hard to hand down or sell the business to someone else. If you decide to quit or in the event of death, the business ends. However, you can establish a ‘doing business as’ (DBA) to transfer or sell the business rights to another party, retaining the name. Without a DBA, you can sell the business assets rather than the firm.

Conclusion

Although it seems like a perfect profession, being a sole trader is not so easy, because sole trading has many pros and cons, as outlined above. However, it’s wise to consider other entity types and their offers before making the final choice.