Although being a sole trader is one of the simplest ways to get started in business, there are many processes that need to be followed
Operating or considering starting a business as a sole trader ?
The following advantages and disadvantages must be considered:
advantages of setting up as a sole trader are:
- Total control – You have total control over the business. Decisions can be made quickly and easily, from accounting and financial decisions to general business decisions.
- Easy to change to another operating identity. It is relatively easy to change your operating identity from that of a sole trader to an incorporated company.
- Keep the profit – As the owner of the business, all the profit belongs to you.
- Business affairs are private – When you run an unincorporated business your accounts are not made available to the public, therefore, competitors cannot see what you are earning hence they will know less about how your business works and how it succeeds.
- No need to apply for a separate TFN – Your business profits are taxed with your other income on your personal Income Tax Return.
The reasons why sole traders are often successful are:
- They can offer a more personal approach – A smaller business can have closer contact with their customers and develop a close rapport in order to give a high level of service and customer care.
- They can be sensitive to the needs of their customers – Since you are closer to the customer that allows you to react more quickly to their needs than a larger business.
- Can cater for the needs of local people – Small local businesses will be closer to the community and can develop good business relationships with their understanding of the area and local knowledge.
The main disadvantages of being a sole trader are:
- You are personally liable and accountable for all your businesses debts – Should your business fail you could end up losing your personal assets such as your home, car, etc.
- Can be difficult to raise finance – When you run a small unincorporated business, banks will not lend you large sums and you may find raising finance for the business is very difficult unless you are prepared to change your ownership status.
- Can be difficult to enjoy economies of scale – Smaller business often find that they cannot buy supplies in bulk and do not enjoy the same discounts as larger businesses.