The limitations of a sole trader status business

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There’s so much information about starting businesses online. A quick google search throws up an endless mass of pages, and the first seventy of those pages seem to focus in on simplification and inclusivity.

I get that giving people confidence in their ability to start a business is a great thing, but it’s not all about pretending everything is much simpler than it is. There are definitely complications and limitations inherent to the simplest and easiest route, and the sad fact is that, if you’re truly passionate about your business idea, then you should already know that. So let’s start with something practical; some information about becoming a sole trader.

Starting out as a sole trader can seem to make a lot of sense, but it really doesn’t work for every business. It’s not a fix-all solution to your small businesses legal status. It might work well as a launch pad for some businesses, but it won’t for others. That’s why we’ve compiled this article, detailing a few key points and issues surrounding sole trader-status businesses, things you really need to bear in mind if your business is to be a success.

Total and Complete Liability

The biggest and scariest limitation of any sole trader based business is the issue of liability. In the case of a normal limited company status business, if the business takes a nosedive and tanks, amassing debt, then the business, as a separate entity, bears the weight of the debt. There’s no such divide between you and the business with a sole trader business. Which is somewhat scary. If literally everything were to go wrong, and your business were to implode horribly, you’d be totally, utterly liable for all the debt incurred. Any and all your assets would have to be liquefied to pay off your debt.

This risk of total bankruptcy is pretty scary, but there is the upside that as a limited benefit that as a small sole trader company, you aren’t all that likely to incur that much debt, in light of bigger companies, and the astronomical debts they find themselves in upon going caput.

Limited Tax Benefits and Allowances

When compared directly to a bigger limited company status business, and the tax rates they are afforded in most of the world, the taxation rates and profit taxes are pretty high. This means that a big chunk of your profits, which you could be pumping straight back into the company and encouraging growth with, are going straight to the tax man.

While absolutely annoying, this isn’t actually too much of an actual concern. Especially considering that as a small sole trader based business, you can’t realistically expect to be making extreme profits, and when you do, you’ll logically convert to being a different business status, allowing for more growth and development. Having said that, at that early stage of a business, every bit of funding, and really pinching the pennies can be crucial.

Heavy, Heavy Responsibilities

Whatever you do, do not quit your day job before the business takes off. As a sole trader status business, literally everything the business does, every success and footstep towards success it takes is down to you. It only takes one slip, and massive damage can be done to your fledgling business. This is the cost of being the sole trader. While you have complete control, and potential for beautiful single-handed success, you also have the recipe for complete and utter failure, combined with liability.

Things like human error, consistency of work, motivation and integrity. If any of these things are an issue for you, starting a sole trader business might be something of a risky venture. That combination of heavy liability, and intense focus and bottle-necking around you can make for a bad situation. Just make sure you don’t quit your day job too soon.

Difficulty of Funding

Banks do not like loaning to sole trader businesses. Neither do investment firms and groups. They’re like that for a number of reasons. You just have to take one look at the endless roster of sole trader businesses founded that never made a penny to guess why. It’s pretty easy to start a sole trader scale business, and that can look amateurish. On top of that, the liability issues can make it very awkward.

Take this in an entrepreneurial way, and see it as a chance to up your pitching skills. Develop those sales and presentation skills, and win over any reluctant investor. If you’re set on a being a sole trader business, it’s really your only choice.

We’d like to thank Informi for this insight.

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