a sole trader

is a business entity owned and run by one person, where there is no legal distinction between the owner and the business. The individual holds all assets of the business and so acquires all benefits and risks of running the enterprise. This means that the individual risks losing their personal assets if the business fails.

  • Sole traders have fairly simple accounts and are required to submit an individual self assessment tax return annually, possibly along with any other VAT and payroll returns depending on their circumstances.
  • Professional accountancy advice is normally required to prepare business accounts, tax returns and administration around VAT and payroll. However, there is less complexity compared to limited companies, which can result in reduced administration costs.
  • There is no requirements to make information public.
  • The business can generally be run in the matter in which the proprietor/owner wishes.
  • Sole traders have unlimited liability; there is no separate legal identity between the business and the owner. Therefore the owner is personally liable for the business’ debts, which means the owner's personal assets are at risk. When first trading the business may be small and consequently there may be lower exposure to cost and risk, but as the business grows the trade naturally becomes larger and riskier. It is usually much better from a risk perspective to trade through a limited company. This is one of the main issues considered when deciding on the structure of a new company formation.
  • In most cases, the tax burden is relatively high compared to trading as a limited company.
  • The credit rating of the proprietor can affect the business' credit rating.
  • It can be hard to raise funds when trading as a sole trader. The business may appear less established and so less able to repay loans compared to a limited company.
  • Being perceived as a less established business may impact on the owner's ability to sell the business. Potential acquirers often perceive unincorporated business' to have a lower value when compared to a limited company. Therefore when selling the business on you may receive less than if it was a limited company.

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UK Company Formation
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