Sole trader, as the name suggests, is where an individual is the sole owner of a business. The business is often quite small in terms of size (as measured, for example, by sales generated, or number of staff employed) however the number of these businesses is very large indeed.
Examples of these businesses can be found in most industrial sectors but particularly in most service sectors. Hence services such as electrical repair, picture framing, photography, diving instruction, retail shops, and hotels have a large proportion of sole trade business.
A sole trader business is easy to set up. No formal procedures are required and operations can often commence immediately (unless special permission is required because of the nature of the trade or service, such as running licensed premises).
The owner of a sole trader business can decide the way in which the business is to be conducted and has the flexibility to restructure or dissolve the business whenever it suits. The law does not recognise the sole trader as being separate from the owner and so the business will cease on the death of the owner.
Although the sole traders must produce accounting information to satisfy the taxation authorities, there is no legal requirement to produce accounting information relating to the business for other user groups.
However, some user groups may demand accounting information about sole traders and may be in a position to have their demands met (for example, lenders require accounting information on a regular basis of the leans). The sole trader will have unlimited liability which means that no distinction will be made between the business wealth and the sole trader's personal wealth if there are debts of the business which must be paid.
Trading as a sole trader has many advantages. Not least that you are able to give a more personal service to your customers and you are able to make changes within your business very quickly due to the fact that there is little or no bureaucracy, there being only one person to make the final decision. It is important for a sole trader to remember this fact and exploit it.
Other advantages include having complete control over the business and its profits; you are able to use any money the business brings as you deem fit without having to justify your spending. However, as the expansion of the business depends on the amount of capital you are personally able to inject, you may find as a sole trader that investing in the growth of the business very difficult, as capital is often not easy to find.
In addition, as a result of the inability to assist expansion, your competitors would have the edge over your sole trader business; for example, businesses with greater access to investment would be able to adapt more quickly to market demands leaving you struggling to compete.
Larger organisations could change the prices without feeling the impact as much as the sole trader would. Multi-nationals would be able to cope with demand and supply more readily and far more quickly that a small sole trader, as greater investment would allow them to buy equipment, increase production, adopt new technology and develop new ideas.
The pressure put upon the sole trader must not be ignored, and if you are thinking of becoming self-employed as a sole trader you must address this issue as it could ultimately threaten the survival of your business.
Apart from the pressures placed on the sole trader by the larger organisations, you are also fully liable financially, and the need for your business to examine the implications and consequences of bankruptcy or loss of personal possessions due to the individual accepting unlimited liability must also be considered. The larger your business becomes the great risk will be undertaking in operating as a sole trader.
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