Advantages and Disadvantages of a Sole Trader Business
The term sole trader and sole proprietorship can be used interchangeably. A sole trader exists as an unincorporated business owned by one person. A sole trader comes into existence when a single person decides to start a business.
A number of advantages occur when operating as a sole trader in terms of control and ease of formation. Conversely, sole traders may have disadvantages in terms of raising capital and continuity of operation.
Organising as a sole trader provides a business owner with the easiest and most inexpensive way to start a business, explains the Lazy Business website. There are no documents to file with the state when you operate as a sole trader. This means you do not have to pay a fee to file documents with the state, which makes it more cost effective to form a sole proprietorship as opposed to a corporation or a limited liability company. Also, there are few formalities to deal with when operating as a sole trader. You will not have to prepare financial statements, hold meetings, draft bylaws or file annual reports when operating as a sole trader. This minimises the amount of paperwork you have to deal with when running the business.
Capital and Continuity
Raising capital may be a significant disadvantage for a sole trader. Unlike a corporation, a sole trader cannot issue stock as a way of raising money for the business. This means a sole trader has to rely on his business assets as a way to secure financing for the business. If a sole trader lacks business assets, she may have to use her personal credit to secure loans for the business. This puts sole traders with poor credit history at a disadvantage when it comes to raising funds. Lack of continuity is another big disadvantage of operating as a sole trader. When a sole trader retires, dies or decides to sell the business, the company's existence automatically comes to an end.
The ability to control every aspect of the business is a great incentive to operate as a sole trader. When operating as a sole trader, there is no need to take votes on business issues, which allows a sole trader to react quickly to changes in the business environment. Sole traders may be able to establish more personal relationships with customers, as opposed to bigger businesses that operate on a more global scale. In addition, sole traders have the ability to use company resources in any manner. For instance, sole traders can use business funds to meet personal obligations at the discretion of the business owner.
One of the biggest disadvantages faced by a sole trader is the lack of limited liability protection. Sole traders have unlimited liability for debts and obligations that may arise while operating the business. This means if the company loses a lawsuit, the judgment may extend to the owner's home and other personal assets if the company's business assets are not sufficient. Business creditors of a sole trader may pursue his home, automobile and other personal assets as compensation for business liabilities. Also, personal creditors of a sole trader may go after business assets from the company as compensation for a sole trader's personal obligations.