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What are the advantages of being a sole trader - and the disadvantages?

Setting up as a sole trader is the simplest way of starting a business. You simply advise HM Revenue & Customs that you have decided to start a business as a self-employed sole trader.

For relatively small businesses, particularly if you will be working on your own, setting up as a sole trader helps you keep administrative costs and paperwork to a minimum. Being self-employed can also help minimise the total National Insurance contributions you have to pay.

Against these advantages of being a sole trader you need to be aware of several potential drawbacks:

  • You are personally liable for your business debts. If the business runs into difficulties, your personal savings and assets could be at risk.
  • Some business customers are reluctant to deal with sole traders in case of tax complications — for example, if HMRC decides that the sole trader should be treated as an employee of that business.
  • Some customers prefer to deal with private limited companies, as they perceive them as being more substantial than a sole trader.
  • Your options for raising money to finance the business are relatively limited. You cannot sell shares in the way that a private limited company can.
  • It can be more difficult to sell your business as a sole trader, particularly if it is heavily reliant on you.

If you do decide that setting up as a sole trader is right for you, you have the option to form a private limited company later — as your business grows and your circumstances change.

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