Businesses can operate under various different structures and there may be various reasons for choosing a particular one.
Whilst there are various advantages of operating as a sole trader there also come with it important disadvantages.
A sole trader business has no distinction from the individual. Therefore, the debts of the business are the same as the individuals and where debts can’t be paid off creditors can have your personal assets such as cars and homes sold to recover money. This is known as unlimited liability – the opposite of a limited company where liability is limited.
Perceived lack of prestige
A sole trader may not appear to have the prestige of a limited company. This may be completely inaccurate but the public perception of a sole traders is often of a business that is smaller and less professional businesses than a limited company. This credibility may lead individuals to want to operate as a limited company.
Access to finance
Lenders tend to prefer dealing with companies due to the greater transparency that comes with it. Loan terms may also not be as favourable compared to limited companies.
All profits made by a sole trader are subjected to tax and national insurance. Under a limited company structure this is not the case as there is a choice of how much profit to draw down as dividends. Dividends are also taxed at lower rates.