A sole trader is a business person who owns his or her own business. This means that they are liable for all debts incurred by the company. If the company cannot pay its bills, this person will be held personally responsible. When people think about starting a new business many of them consider being their boss to be one of the main benefits that come with owning your own business.
However, it also brings with it greater responsibility and there are certain things you should know before you decide to go into business on your own as a sole trader.
1) Responsibility
The first and most important thing you need to be aware of as a sole trader is that you’re entirely responsible for everything related to your business: debt, taxes and profits. It doesn’t matter if the company is at fault, you’ll be held personally accountable for anything they do or fail to do.
2) Capital Requirements
When starting a business as a sole trader, it can be helpful but is not necessary to have some capital behind you. These funds will help with establishing the business and keeping it running during its early stages of life when there often isn’t much, if any, money coming in. As your sole trade business grows and becomes more profitable these initial costs can easily be covered and ideally even provide a good return on investment.
3) Expanding the Business
One of the most important things required by any business is expansion. A common problem with sole traders is that they typically lack both the time and financial freedoms needed to focus on growing their business. In addition to this, they can often find themselves lacking the expertise required to take their company to a higher level of success.
4) Limited Financial Security
Sole traders have limited financial security for several reasons: they cannot draw a salary from their business and depending on how successful it is, they may be unable to save any money for a rainy day. A sole trader also has no entitlement to receive contribution-based benefits such as sick pay or holiday pay.
This is because running a sole trade company means you are self-employed which automatically withholds these entitlements from you even if you work more than 30 hours per week.
5) Taxation
When starting in business as a sole trader, taxation can be worth considering. Taxation for self-employed people is considerably higher than what you would pay as an employee and this difference can vary depending on where you’re located. The best course of action if possible is to speak with the taxman directly before making any decisions about your company structure or leaving full-time employment.
Sole traders are responsible for their taxes, which means that they must submit tax returns every year and pay income tax on any earnings their business makes.
6) Personal Liability
There’s nothing worse than seeing your hard work go up in smoke because you failed to protect yourself from personal liability by thinking through all of the risks properly. As a sole trader, there is no limit to the amount of personal liability you could face if something goes wrong, so it’s important to take steps to protect yourself and your business.
7) Retirement Planning
One of the biggest concerns for any sole trader is how they’ll be able to fund their retirement and ensure that they will have enough money in savings by the time they leave the workforce. Since self-employed workers don’t qualify for certain benefits such as company pension schemes, much of this responsibility falls on them.
There are several alternatives when it comes to funding your retirement but regardless of which one you choose, this is something that should be taken into consideration before becoming a sole trader.
8) Outsourcing
As a sole trade business owner, there may come a time when you want or need to outsource tasks to free up some of your time. This could be anything from ordering stock, bookkeeping, writing a marketing plan to send invoices.
Asking friends and family members for help won’t cut it when you are running a business because they are likely not professional enough to handle these matters on your behalf. Outsourcing is very common with many different types of businesses but is particularly true for sole traders.
9) Contribution-Based Benefits
As mentioned earlier, contribution-based benefits such as sick pay or holiday pay are not available if you’re self-employed. If you have employees then the situation is slightly easier, however, if you don’t have any employees then these entitlements are not available to you and if you’re planning on growing your business by taking on employees at some point then it’s wise to consider this.
10) Limited Growth Potential
As a sole trader, your ability to grow your business without help is likely going to be limited. This is because as the owner of the company, you will usually have one of two roles: either running the day-to-day tasks such as marketing and administration or doing all of the work yourself.
The growth potential for most sole traders is somewhat limited because they can’t afford to hire additional staff or outsource certain tasks so their capacity for growth is restricted by this.
11) Limited Resources
Sole traders often lack access to support and development which can sometimes slow growth and hinder progress. It’s not uncommon for sole traders to run into problems that they can’t tackle on their own, such as insufficient funds or lack of knowledge in a certain area. This is where seeking expert advice from professionals such as lawyers or accountants could be very beneficial.
12) One Set Of Tax Forms
One of the biggest risks with becoming self-employed is the risk of making mistakes because you don’t understand all of the tax implications involved. Since creating your company structure will take up significant time, it’s often best to seek advice from an accountant so you aren’t left with any nasty surprises down the line.
Due to this reason, there are actually some benefits to being a sole trader but it’s important that you are aware of the risks before starting your new company.
13) Business Expenses
Since sole traders are responsible for all of the business expenses, not just ones that directly relate to earning money, there is a chance they could spend too much or fail to keep records up-to-date so their net earnings are lower than expected.
This can be quite difficult because it means you have less income tax to pay but if you don’t file these expenses properly then this could result in more problems down the line.
14) More Stress
Unfortunately becoming self-employed also often has some hidden stress factors that many people aren’t expecting. It’s not uncommon for some single founders to experience depression during the first few years in business, which means they have to take time off work in order to recover.
This can obviously cause problems if you are your own boss because it means you don’t have the luxury of being able to call in sick without worrying about how you will be paid.
15) No Sick Pay
As mentioned earlier, there is no such thing as sick pay when you run a company on your own. The UK even has a system called state health care, meaning that if something happens and you become physically or mentally incapable of working then there won’t be any compensation for this loss of earnings.
You need to be able to totally rely on yourself and not fear for your income if something like this were ever to happen.
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