Sole trader advantages and disadvantages

Sole trader advantages and disadvantages

Becoming a sole trader has a lot of benefits, but there are some disadvantages you should be aware of too. Here’s what you need to know.

Advantages of being a sole trader

Keep all your profits

As a sole trader you get to keep all the profits from your business after paying tax on them, unlike when you run a limited company.

Full control of your business

It’s quick to make decisions as a sole trader, because you have full control over your business and how you run it. You really are your own boss!

Easy to set up and report each year

It’s easy to set up as a sole trader and report on your taxes each year. You simply need to register with HMRC, then complete an annual Self Assessment tax return to pay your tax, and also make your National Insurance contribution. If your turnover is over £85,000 a year you will also need to pay VAT using the Making Tax Digital scheme.

No responsibilities for having employees

When you are a sole trader, you often don’t have to worry about the responsibilities of being an employer. But, you can hire employees if you want to!

Financial data is private

Your information, and financial information are kept private. This is different from running a limited company, where company and financial information is public with Companies House.

Disadvantages of being a sole trader

Liability for your debts

You have full liability for your debts, and any problems if the business goes wrong. This could be your business going into debt and having to personally pay it off. For other potential problems like customer injury or causing property damage, public liability insurance can help.

It can be hard to raise money

It can be harder for sole traders to raise finances than a limited company, which can affect growing your business.

Not as tax efficient as a limited company

All income as a sole trader is liable for income tax and National Insurance. This can make being a sole trader less tax efficient as running a limited company, especially if your profit is over £30,000 each year.

Sick and maternity pay

As a sole trader, it can be difficult to meet requirements for sick and maternity pay. Sole traders aren’t entitled to Statutory Sick Pay, but might be able to claim Employment and Support Allowance. If you pay Class 2 National Insurance for a specified time period before you’re due, you are entitled to Maternity Allowance from HMRC.

Accounting software for sole traders

It’s easy to take control of your finances as a sole trader. Bokio is the free accounting software that has everything you need to manage your business finances in one place.

Bokio’s bookkeeping, invoicing and expenses software keeps accounting simple, so you have more time to spend on your business.

Create your free account