When you start a new business there is a lot to think about and plan. One of the many important decisions that you will need to make is whether to trade as a sole trader or as a limited company. This Sole Trader Guide will provide some detailed insights into having a sole trader business, I suggest that you also take the time to read or watch my Limited Company 101 Guide.
What is a sole trader?
A sole trader is a person who starts and operates a business by them-self. There is no investment from 'third' parties and the owner of the business has unlimited liability for business debt i.e their own personal assets can be sold to pay for business debt, if the business goes insolvent.
Characteristics of a sole trader
Sole traders are usually small in size and usually have no or very few employees. Profits are usually also small. Some businesses start as sole traders and later become limited companies as the business grows. Most sole trader businesses are always run by the owner, personal service and supervision is the norm.
Profits from the business are usually ploughed back into the business. Any profits taken from the business are not classed as a wage or salary but as drawings.
Advantages of being a sole trader
The business is very easy to set-up
There are very few legal requirements
The owner has full independence and can run the business without the need to involve others in decision making
Disadvantages of being a sole trader
The owner is fully responsible for business liabilities. Personal assets will be taken and sold to pay off business liability
Capital investment is limited to the business owner only
The Final Accounts
Financial statements (final accounts) have key differences for sole traders compared to limited companies. These statements comprise of only...
A trading and profit and loss statement - this shows the amount of profit or loss for the business over a certain period
A balance sheet - this shows the assets and liabilities of the business. Quite often, sole traders may only have a profit and loss statement, the balance sheet being optional.
To help learn the material in this post, please check out my Sole Trader's Guide video below...
If you would like to learn more about bookkeeping and accounting for a sole trader business, please consider taking my Exclusive Bookkeeping and Accounting Course.
I can book-keep and file your sole trader accounts, please email me for details firstname.lastname@example.org