SOLE TRADER

Introduction

A sole trader business is a business owned by one person, although the organization
may employ more than one person. The sole trader’s business will trade under the
owner’s name or a name chosen by the sole trader. To safeguard against legal
proceedings the sole trader should ensure that they don’t use a name registered to
someone else.

Examples of Sole Trader Businesses

Examples of sole trader businesses include small retailers, plumbers, builders, internet
entrepreneurs, beauticians, market traders, grocers and butchers. A large number of
people setting up a new business for the first time will create a sole trader business.

Sole Trader – What is a sole trader?

Definition: A sole trader is a company started and run by one individual.

A sole trader - also known as a sole proprietorship or simply proprietorship - is a type of business
entity which is owned and run by one individual and where there is no legal distinction between
the owner and the business.

A sole trader is a company started and run by one individual

A very large proportion of business conducted in the UK is undertaken by the trader working on his own
usually providing his own money (capital) to start the business.

The liability of any debts of the business will be down to him. In such a business there will probably be
only one person doing this. He would normally deal with the day-to-day bookkeeping and then hand
over the records to an accountant who will prepare the final end of year accounts and compute the tax
due.

This means that the owner has unlimited liability. It is a "sole" proprietorship in the sense that the
owner has no partners (partnership).

A sole proprietor may do business with a trade name other than his or her legal name. This also allows
the proprietor to open a business account with banking institutions.
 Easy to set up - but difficult to keep a float
The main advantages of a sole proprietorship are that they are easy to start up, they are subject to
fewer regulations relative to other types of businesses, the owner has full autonomy with regard to
business decisions, and they are easy to discontinue. Another advantage is that one takes all the profits
of the business.

A disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying
the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a
corporation or, more recently, a Limited Liability Company.

Sole proprietorship – advantages and disadvantage

Advantages of sole trading include that:

 Owner is the boss

 keep all the profits

 Start-up costs are low

 have maximum privacy

 establishing and operating your business is simple

 Easy to change your legal structure later if circumstances change

 can easily wind up your business.

 Disadvantages of sole trading include that:

 You have unlimited liability for debts as there’s no legal distinction between private and business
assets

 Your capacity to raise capital is limited

 All the responsibility for making day-to-day business decisions is yours

 retaining high-calibre employees can be difficult

 It can be hard to take holidays

 You’re taxed as a single person

 The life of the business is limited.

The characteristics of the sole proprietorship form of business organizations are:

 It is the simplest form of organisation as it does not involve any legal formalities.
 It is owned and controlled by a single individual.
 The individual assumes all sorts of risks exposed to the business.
 The liability of the sole trader is unlimited.
 The sole trader enjoys unlimited freedom of action and decides everything quickly.
 The business unit is not separate from the sole trader.

Main Features of Sole Trader

 Structure
 A sole trader business consists of a single owner. A sole trader may act as the
only individual that works in the business. In other instances, an unlimited
number of individuals and managers may be employed by a sole trader, but there
will only be one owner. A sole trader is an unincorporated business that is not
required to register with Companies House UK in order to begin operating.
Typically, corner shop owners, builders and plumbers will operate as a sole
trader, according to the Complete Formations website.

Liability
 Sole traders assume all the risk for events that happen while operating the
business. A sole trader and the business are viewed as the same entity, which
makes a sole trader personally liable for all business lawsuits and debts that may
accumulate. Business lawsuits and debts may be paid from a sole trader's
personal assets if the business assets of the sole trader are not sufficient to meet
an existing debt or obligation. In this scenario, for example, a sole trader may be
required to sell a car to meet a business liability.

Taxation
 Sole traders are required to register with Her Majesty's Revenue and Customs
(HMRC) to indicate the person will be receiving self-employment income. Self-
employment income earned by a sole trader is taxable by the Inland Revenue.
Sole traders are not required to file corporate tax returns. Furthermore, sole
traders that make less than 70,000 pounds in annual income are not required to
pay value-added tax.
Decisions
 Sole traders are responsible for all business decisions. Operating as a sole
trader gives the business owner complete control over every aspect of the
business. The business profits of a sole trader go to the business owner and may
be used in any manner deemed suitable by the owner. Unlike a limited company,
there are no other shareholders to help a sole trader with business decisions.
While it helps to have more than one perspective when it comes to making
business decisions, operating as a sole trader allows the business owner to react
faster when important business decisions need to be made.

Other Considerations
 When a sole trader dies the business will automatically come to an end. Also,
sole traders may experience difficulty in terms of raising capital to operate the
business. Investors may be more likely to invest in a limited company, since the
personal assets of the business owners are protected from the debts and
obligations of the business. Banks may frown upon lending large sums to a sole
trader, according to the Tutor 2U website. Sole traders may find it difficult to
finance business operations on a long-term basis without changing the structure
of the business.

What Is the Importance of a Sole Trader?

1. Sole Trader Basics
o A sole trader business is also referred to as a sole proprietorship. As the name
implies, it is a business owned and operated by a single person. If you own a
business with a partner or if your business is set up as a corporation, it is not a
sole trader business.

Establishing a Sole Trader Business

o A sole trader business is very easy to set up. In order to become a sole trader, all
you have to do is begin working. For example, if you are a plumber by trade,
fixing someone's pipes and collecting a fee for your services automatically
establishes you as a sole trader. There is no paperwork to file, no contracts to
sign and no partnership agreements to be drafted.

Tax Benefits
o In addition to the ease of establishing a sole trader business, sole traders have
two distinct advantages when it comes to taxes. First, as a sole trader you do not
suffer from double taxation. If you set up your business as a corporation, you will
have to pay corporate taxes on business profits and personal income tax on any
money your corporation pays you. As a sole trader, the government does not
make a distinction between your personal income and profits from your business.
Additionally, as a sole trader you can deduct business expenses, which reduces
your taxable income when you file.

Downside
o The biggest drawback to setting up your business as a sole proprietorship is it
leaves you personally exposed to business liabilities. The courts do not make a
distinction between you and your business, so if your business is sued or goes
bankrupt creditors are free to attach personal assets such as your house, even if
they are not business-related.

Objectives of a Sole Trader

 Limit Risk
 For the professional sole trader, limiting risk is the most important aspect of
trading. Some professionals highlight this aspect of trading by saying that
amateurs try to make money while professionals try not to lose money. Risk
management ties in with discipline because not every trade is a winner. Traders
who cut their losses immediately stand a better chance of success in the long
run.

Manage Trade Size

 The goal of a sole trader is to increase his trading account balance. The trader
must manage the size of each trade so that he doesn't risk too much capital on
any one trade. The size of each trade should represent a reasonable fraction of
total account value. When the trader enters appropriately sized positions, he
greatly reduces his chances of blowing out his trading account.

Control Costs
 Trading costs include commissions, hardware, software and access to
information sources. As in any business, the sole trader must keep costs as low
as possible. One of the best ways to control costs is to find a reliable broker who
offers low commissions. Many brokers offer commission discounts for active
traders, so these deals are worth looking into.

Manage Time
 Time management is important for the sole trader. The trader must effectively
incorporate research, market scanning and trading into a regular daily schedule.
Particular schedules may vary significantly from trader to trader, but the
important thing in any case is to use time effectively. Setting a fixed schedule
also enables the sole trader to treat trading like a legitimate business rather than
a hobby.

What Is the Difference Between a

Partnership & Sole
Proprietorship?
Two or more individuals must participate in the ownership of a
partnership. Sole proprietorships are businesses that are owned
and operated by a single business owner. Partnerships and sole
proprietorships are relatively easy to form because formation
paperwork is not required to begin operating either business type.
Partnerships and sole proprietorships are not separate entities
from the owners of the business.

Example for sole trader ……..

Damro

Multilac

Cinnamon grand Colombo

Caso Colombo

Saman willa

Cinnamon wild yala

The Kingsbury

Wijaya graphics

Conclusion
Although many businesses are created as sole traders, once they reach a certain size
the business owners may decide to turn it into a limited business. This is because the
owners of a sole trader business are personally responsible for the debts of the
business. Their personal money and assets could be used to meet business liabilities.
However the owners of a limited business are not personally responsible for its debt
and liabilities.