Sole traders have a number of advantages over other businesses. However, there are also a number of disadvantages to running a business as a sole trader. In this article we’ll look at the benefits of being a sole trader, how it can make life easier, and some of the disadvantages of running a limited company. We’ll also look at the Accounting process for a sole trader and the Disadvantages of having a Limited Company.
Disadvantages of being a sole trader
As a sole trader, you are your own business, which means that you control every aspect of your operation. This structure gives you total control and fewer reporting requirements than a company. As a sole trader, you are also responsible for all of your business’s finances, including paying all taxes. You must also track your eligible expenses, issue invoices, and submit self-assessment returns.
Sole traders cannot offer shares in their business to outside investors. If you need to raise capital for your business, you will most likely need to find investors or banks. The downside of being a sole trader is that you are completely responsible for every decision and failure of your business. This can be stressful. You need to make sure that your business is profitable and that you can survive the challenges it faces.
Having a Limited Company as a sole trader can dissuade customers
Many customers will be put off by the fact that your business is not a Limited Company, so why would you want to change that? Having a Limited Company means that your debts and obligations are not personal to you. However, this does mean that unexpected problems can arise. Limited companies also cost a lot of money to run because of all the accounting procedures and tax preparations. As a sole trader, it’s important to have insurance to protect yourself and your business.
Another advantage to having a Limited Company is that you’ll be paying a lower tax rate. You’ll also have more liability protection. Many people are also hesitant to purchase a product or service that is produced by a Limited Company because of the higher price tag. Having a Limited Company, however, may put off customers because they believe that the product or service is only available through a company.
Raising capital as a sole trader
Sole traders have limited options for raising capital. They can use personal capital, retained profits, credit lines or hire purchase. When the business grows, however, the owners will need to dilute their ownership. Depending on the industry, there are many options for raising capital. If you’re a sole trader, you can look into P2P or alternative finance providers. If you have a poor credit score, you can opt for unsecured business loans.
In addition, many sole traders have no experience in raising finance. However, these entrepreneurs can use their personal possessions to cover the business’ debts. Often, sole traders have long working hours and have to deal with paperwork each month. Additionally, they are often unable to work if they are unwell or on holiday. The firm can also end because the sole trader dies. In such a case, raising capital as a sole trader can be a difficult task. Many sole traders have to use the family home to get started.
Accounting process for a sole trader
Sole traders often leave the bookkeeping process until the very last minute. Thornton & Associates advises sole traders to use Xero accounting software, which helps to record invoices and expenses as they happen. With Xero, all numbers are stored in one place so they can be easily retrieved when needed. Contact Thornton & Associates to learn more about using Xero for your business.
Sole traders do not need to set up a separate business bank account but they should open a personal account to separate the business from their personal finances. Having a business account is helpful for keeping track of business expenses and identifying business income and expenditure. It is also easier to file self-assessment tax returns. It’s not necessary to have a separate bank account for your business but it will be easier to manage.