Disadvantages of being a sole trader
Being a sole trader has some wonderful advantages, but also some important disadvantages that you must be aware of. Therefore, to help make your life easier, we’ve collated some of the most commonly agreed disadvantages of being a sole trader in the UK. Hopefully you’ll find this information useful!
If business is going well, it can be easy to forget that sole traders face liability for debts that are occurred by their business activity. When you think about it – sole traders are in a very vulnerable position.
Because their business is not seen as a separate entity (unlike a limited company where the director has limited liability), a sole trader Is responsible for ensuring all liabilities that the business owes are settled. This means that potentially (worst-case scenario), a sole trader could be forced into selling personal items to settle a debt that has been caused entirely by business operations. This could include the sale of a house to raise capital, or bankruptcy.
Some organisations may not engage with sole traders
We’re not saying they’re right, but many people perceive sole traders as small entities that are not as established or qualified as limited companies. This can sometimes be damaging to sole traders – even though it’s very unreasonable.
Some organisations won’t engage with sole traders, which is frequently because of the lack of prestige that sole traders are considered to have compared to limited companies. Another reason is the processing of payments. It’s common practice to vet suppliers before committing to one. Because limited companies have publicised finances and it’s easier to understand how financially sound they are – they’re often the only option for cautious firms. Sole traders are sometimes not an option.
Potentially not as tax-efficient
There are loads of benefits to being a sole trader, and paying tax and National Insurance Contributions is pretty straightforward. And, you’re able to get tax relief on actual business expenses. However, when profits start reaching £25,000 – sole traders could benefit from becoming a limited company. We appreciate this isn’t everyone’s cup of tea, and there is no right or wrong option. However, if you’re looking to legally retain as much money as possible – perhaps a limited company is the way forward. If you want to know more about limited companies, check out our page: Advantages of limited company contracting.