Disadvantages to Being a Sole Trader

Written by steve johnson
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Disadvantages to Being a Sole Trader
Sole Traders are completely accountable for their business (Stockbyte/Stockbyte/Getty Images)

Being a sole trader—or sole proprietor as it in legally known in the U.S.—is a benefit to many people who are looking to start their own business. It is one of the most common types of businesses that can be formed and involves only one person as the responsible entity of the business—holding that person completely accountable for any debt or liability that the business might incur. Although sole traders have many advantages, they also have many significant disadvantages.

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Liability

The main disadvantage to being a sole trader is the liability that the business owner yields. Being held responsible for any lawsuits or potential damages is not only dangerous to the sole trader’s business, but it can be detrimental to her personal life as well. Unlike modern business corporations—such as LLCs—which allow the business to be a separate entity, preventing anyone from holding your personal assets responsible for your business, sole traders are personally responsible for their business.

Responsibility

One of the main disadvantages to many people for running a sole proprietorship is the complete responsibility that the sole trader has. Completely variant from business to business, since each business has its own type of operations, sharing responsibility takes a huge burden off of most business owners. That is one reason for the popularity of Limited Liability Corporations, Limited Liability Partnerships, and partnerships. These businesses each allow some owners to share or take less responsibility, leaving them to grow and improve their businesses more thoroughly than if they did not have complete responsibility.

Lack of Investors

When it comes to being a sole trader, the business owner can have a difficult time for growing. Not only because of the lack of time that she has because of her tremendous responsibility, but due to investors' lack of interest in a sole proprietorship. Companies are more apt to invest in corporations that have the potential to expand. They also prefer the other benefits of corporations, such as their legal structure and lack of personal accountability. Lack of investors can mean lack of growth for many companies---which can leave many sole traders running a stagnant business.

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