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Sole Trader

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Business Studies

A sole trader or sole proprietor is someone who establishes and operates a business on their own. Being a sole trader can be a very rewarding, yet risky form of business to operate in. Let's take a look at why this may be.

Operating as a sole trader

People operating a sole trader business work for themselves. Sole traders can hire other people to work with them; However, the only person responsible for the business is the individual operating as a sole trader. They are responsible for all overall business activities and are actively involved in running the business.

The characteristics of a sole trader include:

  1. Confidence: to make decisions and take responsibility for your decisions.

  2. Specialised skills: to succeed at what they do (i.e., plumbing, graphic design, or cutting hair).

  3. Managerial skills: to run the business and keep updated business records.

  4. Flexibility: for carrying out tasks like contacting clients or keeping in touch with manufacturers.

  5. Self-discipline: all business activities are in their own hands. They do not report to an executive, which also means that they do not get advice from anyone.

  6. Motivation: the business will fail to operate unless the sole trader puts in time and effort.

Sole trader benefits

A key benefit of operating as a sole trader is that it is easy to set up the business. Sole traders can start trading as soon as they wish, as there is no need to set up the business officially with a government establishment. As long as a sole proprietor declares their profits to the HMRC (Her Majesty's Revenue and Customs), they are all set up. It is important to declare profits in order to be taxed appropriately.

Another benefit of being a sole trader is the ability to keep all the profits from the business.

Some people also like being their own boss and not being supervised or managed by others. Sole traders enjoy certain freedoms that other working individuals do not.

Sole trader disadvantages

One of the disadvantages of operating as a sole trader is that you are responsible for all your decisions if something goes wrong. As a sole proprietor, you have little to no guidance on dealing with problems if something happens to your business. You also have unlimited liability, which means you are personally responsible for your business' losses and problems. For instance, if you borrow money from a bank and cannot repay your debt, you may risk losing personal possessions like your house or office.

Unlimited liability is essentially the opposite of limited liability.

As a sole trader, you work primarily on your own. This can get lonely and demotivating at times, especially when you are under a lot of pressure to perform several different tasks at once. In these instances, it can be very demanding and difficult to manage your time. You can also risk losing customers and profits if you take time off and close your business.

Another disadvantage is that it can be challenging to grow your business. Often sole traders do not have enough funds for expansion, as they need to use their own money if they wish to grow their business. It is possible for a sole trader to take out a loan, but this can be tricky sometimes, as banks may charge high-interest rates because of the risk of the sole trader not being able to repay their debts on their own.

Advantages of a Sole Trader
Disadvantages of a sole trader
Easy to set up.Risk of losing customers if you take time off.
Quick decision-making process.Pressure to deal with everything by yourself.
Be your own boss.Solely responsible for all your decisions.
Freedom to make your own decisions.Can be lonely working on your own.
Direct contact with clients and the market.Risks of unlimited liability.

Examples of sole traders

A sole trader is a business that is owned and managed by one person. It is a relatively popular form of business. There are various types of occupations you can have as a sole trader.

  • Tradespeople: plumbers, electricians, or gardeners.

  • Freelance workers: graphic designers, web designers, photographers, or artists.

  • Independent contractors: tutors, food delivery drivers, couriers.

Setting up as a sole trader

Operating as a sole trader is a fast and simple way of offering your services. As an example, let's take a look at Chloe, who is a freelance copywriter. As a copywriter, Chloe writes articles and blog posts for companies, promoting their products and services, encouraging readers to visit their websites. She enjoys reaching out to clients, networking, and setting up her own schedule. Chloe sets up a sole proprietorship so she can enjoy flexible working hours, make her own decisions about her business, and has the freedom of not having to report to a manager.

Her business can respond directly to the needs of her clients, engage with them on a personal level, and make decisions freely about the number of clients she takes on. Although Chloe can make all these decisions on her own, it does not mean that she will always make the right decisions for her business. Sole proprietors need to be careful and approach their operations from a managerial perspective. Otherwise, they risk losing track of their goals.

Sole Trader - Key takeaways

  • A sole trader or sole proprietor is a business that is owned and managed by one person.
  • A sole trader is confident about making decisions on their own; has specialised and managerial skills; and is motivated, flexible, and can manage their time efficiently.
  • An important factor to consider when setting up a sole trader is unlimited liability, meaning the individual is solely responsible for all problems and losses that the business incurs.
  • There is no distinction between the individual (sole trader) and the business.
  • There are several benefits and potential falls of a sole trader.

Sole Trader

A sole trader or sole proprietor is someone who establishes and operates a business on their own. They can employ other people if they want, but the sole trader makes all business decisions individually. People operating a sole trader business work for themselves and are responsible for all business activities and decisions involved in running the business.

A person who is the sole owner of a business and makes all business-related decisions themselves. A sole trader is entitled to all the profits their business makes and is personally responsible for all the losses and debts of the business. There is no distinction between the individual and the business (unlimited liability).

Unlike other different types of businesses, such as companies, you do not need to register a sole trader with any government body. As a sole trader, you can start operating whenever, as long as you declare your profits and income to the HMRC (Her Majesty's Revenue and Customs). You need to declare these profits for tax purposes.

Final Sole Trader Quiz

Question

What is the definition of a sole trader?

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Answer

A sole trader is a business that is owned and managed by one person. People operating a sole trader business work for themselves and are responsible for all business activities and decisions involved in running the business.

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Question

What is another term for a sole trader? 


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Answer

A sole proprietor. The terms 'sole trader' and 'sole proprietor' are synonymous.

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Question

Define unlimited liability. 


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Answer

Unlimited liability is when an individual is personally responsible for all the actions of their business. For a sole trader there is no distinction between the individual and the business. This means that the individual is personally responsible for their business losses and problems. For instance, if a sole proprietor borrows money from a bank and cannot repay their debt, they may risk losing personal possessions.

Show question

Question

Which one of the following is not a common characteristic of a sole trader?

  1. Confident in making decisions 

  2. Has business and management skills. 

  3. Can manage their time effectively. 

  4. Reports directly to their manager. 

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Answer

D.

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Question

One of the main disadvantages of a sole trader is:

  1. It is very complicated to set up and register. 

  2. It can get quite lonely working on your own. 

  3. You have direct contact with clients, making it hard to keep up with all the communication. 

  4. You rely on your employees for a lot of different business procedures. 

Show answer

Answer

B.

Show question

Question

Why would someone choose to operate as a sole trader rather than work for a company?


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Answer

  • Flexible working hours.

  • Ability to make all decisions without having to report to a manager. 

  • Being 'your own boss'. 

  • Direct relation to the market and clients. 

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Question

Does operating as a sole trader mean that a business will always be able to make the right decision?


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Answer

No, this is not true. A sole trader has the freedom to make all decisions on their own without the involvement of a manager or other team members. However, this does not mean that a sole trader will always make the correct decision for their business. It is easy to get demotivated, lack appropriate time management skills and become disorganized when you are working without supervision and the guidance of others.

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Question

Does operating as a sole trader mean that you cannot hire anyone to help you with certain tasks?


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Answer

No, as a sole trader it is possible to hire employees. However, it is the sole trader's responsibility to make the right decisions when hiring help, as they are personally liable for all the operations and actions of their business.

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Question

Does operating as a sole trader mean that you are not allowed to take out a loan from the bank?


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Answer

As a sole trader, it is possible to borrow money from a bank or other financial institutions. However, it could be disadvantageous to do this since they often charge high interest rates. Banks do this because they are worried about the sole trader being able to repay their debts in case of failure.

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Question

Which one of the following is not a benefit of operating as a sole trader?

  1. Easy to set up. 

  2. Quick and efficient decision-making process. 

  3. Unlimited liability. 

  4. Keeping all the profits the business makes. 

Show answer

Answer

B.

Show question

Question

Is it true that there are no downfalls to operating as a sole trader?


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Answer

No, this is not true. The disadvantages of a sole trader include: 

  • The risk of losing customers if you take time off

  • Pressure to deal with everything by yourself 

  • The sole responsibility for all business-related decisions 

  • The loneliness of working alone.

  • Unlimited liability. 

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Question

Is it true that by hiring an employee, they are also responsible for the actions and decisions of the sole trader?


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Answer

No, the sole trader is individually and solely responsible for all the actions and decisions they make.

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Question

Name some of the disadvantages of the freedoms a sole trader experiences.


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Answer

One of the advantages of a sole trader is that they can set their schedule and work flexibly. However, this can result in the sole trader having to work long hours and not being able to take any holidays.

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Question

Name three examples of a sole trader. 


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Answer

Several different types of jobs are suitable for a sole trader:

  • Plumbers 

  • Electricians 

  • Gardeners

  • Copywriters

  • Artists

  • Taxi drivers

  • Nannies

Show question

Question

Name and outline an example of someone who would want to set up a sole trader.


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Answer

An example of someone who would want to set up as a sole trader would be a freelance copywriter. They would enjoy the benefits of managing their own schedule, making their own business decisions and the freedoms that come with being their 'own boss'. Their business can respond directly to the needs of her clients, engage with her clients on a personal level, and make decisions freely on the number of clients they take on.


Show question

Question

People operating a sole trader business work for...

Show answer

Answer

themselves

Show question

Question

Which are the characteristics of a sole trader?

Show answer

Answer

Confidence

Show question

Question

To whom do UK sole traders have to declare their profits?

Show answer

Answer

HMRC (Her Majesty's Revenue and Customs) 

Show question

Question

Why is it important for sole traders to declare their profits?

Show answer

Answer

Sole traders need to declare profits in order to be taxed appropriately. 

Show question

Question

Sole traders are able to keep all profits from the business. 

Show answer

Answer

True

Show question

Question

One main advantage of being a sole trader is to enjoy certain freedoms other office workers cannot. 

Show answer

Answer

True

Show question

Question

What is not a benefit of being a sole trader?

Show answer

Answer

Easy to set up

Show question

Question

What are the disadvantages of being a sole trader?

Show answer

Answer

Risk of losing customers if you take time off

Show question

Question

Plumbers, electricians, and gardeners are examples of freelance workers


Show answer

Answer

True

Show question

Question

Give examples of freelance workers

Show answer

Answer

graphic designers, web designers, photographers, or artists

Show question

Question

Tutors, food delivery drivers, and couriers are referred to as independent workers. 


Show answer

Answer

True

Show question

Question

A sole trader is someone who ...

Show answer

Answer

owns and manages the business by his/herself

Show question

Question

What are the managerial skills required for a sold trader?

Show answer

Answer

Skills to run the business and keep updated business records. 

Show question

Question

Sole traders cannot hire other people to work for them. 

Show answer

Answer

True

Show question

Question

What would happen if the solder trader runs out of money for operations?

Show answer

Answer

They need to use their own money if they wish to continue the business. It is also possible for a sole trader to take out a loan, but this can be tricky sometimes, as banks may charge high-interest rates because of the risk of the sole trader not being able to repay their debts on their own. 

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