- Individual Liability - Sole traders are not recognised as separate legal entity. As a sole proprietor, your company's liabilities and debts are also your liabilities and debts. If the firm fails and there are debts to be paid, you will not only lose your income but you will also be forced to pay the money owed from your assets, whether or not they are related to the firm. Because your liability is unlimited, you could lose your home as well as face bankruptcy.
- Some clients will not do business with sole traders - Many clients will simply choose to deal with a limited business due to this sense of prestige and the fact that sole traders are perceived as a greater risk. This can result in you losing business simply because you set up your business as a sole trader.
In some industries, the only viable choice is to incorporate as a limited company. Before you get started, it's a good idea to do some research on your market and potential consumers to see if you can work as a sole trader or whether you'll need to form a limited company.
This restriction may extend from customers to suppliers, who may opt not to supply products or services to a sole trader or may do so on less favourable credit conditions than a limited corporation. This represents the anticipated risk associated with the sole proprietorship company model.
- Inadequate business continuity - When a sole proprietor retires or dies, problems can occur. They or their family may desire to sell the business that they have worked so hard to develop, but doing so is difficult when it is run as a sole trader.
Another factor to consider is what happens if the sole proprietor becomes ill or has an accident and is unable to work. In addition to making it harder to pursue new income prospects, a sole trader working alone will have to figure out how to fulfil existing obligations.
- Inadequate work-life balance - For the vast majority of sole proprietors who do not employ anyone, all of the labour is done by one individual. As a result, taking a vacation or sick leave can be challenging. Many sole traders work long hours to grow their businesses and avoid disappointing customers. The business might consume an increasing amount of time and energy, leaving little time and energy for family or social life.
Having said that, the main issue here is that all of the work is falling on one person. While this is especially true for sole proprietors, it also applies to limited companies owned and managed by a single person. However, whereas a limited company owner can appoint another director, a sole trader cannot do so without first establishing a new business form.
- Access to finance is limited - It might be tough to get finance to expand a business as a sole trader. Banks, in particular, frequently prefer the increased accounting openness of a limited company over the more private nature of a sole trader. Because of this, as well as the perceived higher risks involved, banks may be hesitant to lend substantial sums to sole proprietors. If they do extend loans, the terms may not be as favourable as those granted to limited companies.
Most other types of long-term financing will be unavailable to sole proprietors. They cannot, unlike a corporation, issue shares or other instruments in exchange for investment. Some government programmes may also be inaccessible to persons who have established themselves as sole traders. Persona Finance [enquiries@personafinance.co.uk] can provide business and financial guidance.
