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Business

Study Notes

Unincorporated Businesses - Sole Traders

Level:
AS, A Level
Board:
AQA, Edexcel, OCR, Eduqas, WJEC

The most common type of unincorporated business is the sole trader.

A sole trader is just an individual owning the business on his/her own

Remember that a sole trader can also employ people – but those employees don’t share in the ownership of the business. 

The sole trader owns all the business assets personally and is personally responsible for the business debts.  Crucially - a sole trader has unlimited liability.

The main benefits and drawbacks of operating as a sole trader can be summarised as follows:

Advantages of being a sole trader:

  • Quick & easy to set up – business can always be transferred to a limited company once launched
  • Simple to run – owner has complete control over decision-making
  • Minimal paperwork
  • Easy to close / shut down

Drawbacks of being a sole trader:

  • Full personal liability – “unlimited liability”
  • Harder to raise finance – sole traders often have limited funds of their own and security against which to raise loans
  • The business is the owner – the business suffers if the owner becomes ill, loses interest etc. Can pay a higher tax rate than a company

The simplicity and informality of setting up as a sole trader means that it is used by many small and start-up businesses, including those that are not run full-time. 

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