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20-June-2

Pros and cons of being a sole trader

Setting up as a sole trader is at once immensely rewarding and challenging – here we look at both sides of the coin.

A sole trader is pretty much what it sounds like – a single person running their own company. Unlike, say freelancers, a sole trader will have set up and registered a company and will often have their own premises.

They might employ some part time or contract workers, but the company will be owned entirely by them. The key legal aspect of being a sole trader is that the trader and person running the business are, legally, one and the same. This means that sole traders are personally liable for any debts created by the business.

Pros
Being your own boss comes with a number of benefits….

Easy to get going
Setting up as a sole trader is easy and fast. Often you’ll simply need enough money to put down deposits on new premises – or even just to rent office space in the short term – and then some money to stock it with whatever items you need.

Many sole traders work in retail or service businesses, but could just as easily be a software developer or accountant.

Low wage bill
As you’re the only full-time paid member of staff your overheads are often low. This not only means low wage bills but also not having to pay pension contributions, National Insurance and employee benefits. This drastically helps in reducing the risks of setting up alone.

More control
As a sole trader, you – and only you – will make all the decisions in your business.

This means you can control every aspect, from costings to marketing. But it also means that the buck stops with you – you’re responsible for the bad decisions as well as the good ones.

Agile
As you’re the only person you need to consult about any decisions, it means you can move fast. And with low overheads and not much investment in assets, if you want to drastically change the direction of the business you can do so with little costs.

Cons
But it’s not all fun and games. There are some issues to consider…

Lack of skills
If you’re setting up as a hairdresser or app developer, this is where your skills will lie. It might mean you’re not very good with marketing, accountants or general admin.

In larger companies, you can usually afford to hire someone to do these roles, but as a sole trader you might not be able to.

Long hours
As you’re the only person working, if any work needs to be done it’s up to you to do it. This can mean long hours.

The impact of taking a holiday can be huge, as it can sometimes mean having to shut down the whole business while you’re away.

Risky
Sole traders usually run on fine margins so can be a risky proposition. Larger companies can rely on shareholders or large loans to keep them afloat during tough times. Or they can shrink their business during recessions. Sole traders usually aren’t in this position.

And as a sole trader is liable for any debt created by the company, it could mean dipping into your personal savings – or worse, having to sell a home – to cover debts.

Lonely
Even if you bring in a few part time staff, most of the time you’ll be working alone and the problems created by the business will be yours only.

You won’t have partner or colleague to share the burden with – so consider the idea it could get lonely at times.