A1 Sole Trader
A sole trader is a form of business ownership where one individual owns the business. This means that they are responsible for investment, decision-making and debts. It also means they get to decide on what happens to 100% of the profits. The sole trader and the business are seen as one legal entity so the owner is personally liable for any financial obligations that the business cannot meet. This may include loan repayments, supplier invoices and wages for their staff.
Freelancers such as photographers and writers, tradespeople such as plumbers and electricians, small shops and cafes and consultants tend to be sole traders.
| Benefits of Sole Trader | Limitations of Sole Traders |
|---|---|
| Simple to set up as there are few legal requirements and paperwork than other forms of ownership. | Unlimited liability means that the business and the owner are viewed as the same entity. The sole trader is personally liable for any financial or legal claims against the business. If the business cannot pay its debts, the sole trader must use their personal wealth or borrow money. |
| Full control remains with the original owner as they do not need to consult with anybody else when making decisions. | It can be difficult to raise finance due to the reliance on an individual’s personal wealth. |
| Flexibility due to sole traders being able to respond quickly to changes in the market without having to consult other owners. | Limited expertise as most people have strengths in certain areas. Sole traders are responsible for all functions of the business which requires expertise in a wide range of skills. |
| Profit distribution is 100% to the original owner. They can decide how much to take for themselves and how much to reinvest back into the business. This can be a motivating factor for the entrepreneur. | The workload can be heavy as the sole trader may be taking responsibility for the management of all of the different functions. This can create a high workload getting to grips with the complexities of different functions. |
| Limited growth potential due to the limited resources of a sole trader. This means that they have reduced economies of scale which can reduce their profitability and ability to reduce prices to remain competitive. |