A sole trader is a person who runs a sole proprietorship, a type of business with only one owner.
The sole trader is the only owner of the sole proprietorship. Sole traders are sometimes called self-employed, freelancers, or contractors. Although not all self-employed individuals, freelancers, or contractors set up a sole proprietorship.
Pros of being a sole trader
It’s easy to get set up as a sole trader. Registering a sole proprietorship is usually quicker than registering a limited liability company, and there are fewer requirements too.
Once you’re up and running, you can, as the sole owner, make all business decisions without conferring with shareholders or a board of directors.
Additionally, you usually don’t have to submit an annual report, and it’s generally easier to file and pay taxes.
Cons of being a sole trader
There are, however, some disadvantages to being a sole trader. Firstly, and most importantly, you and your business are considered to be the same legal entity.
What this means is that you’re liable for anything your business might own. If your business goes bankrupt, you could have to sell your personal assets to pay off the debts. Also, if your business is involved in a lawsuit, you’re responsible to cover it, if your business is required to pay the plaintiff.
Sole proprietorship versus limited liability company
Overall, being a sole trader gives you a lot of freedom and flexibility. It’s quick and easy to set up and run, and might be a good fit for you if you’re planning to operate on a small scale.
However, if you’re planning to get investors on board, and to grow and expand your business—or to take on expensive projects, where the risk is higher—you should consider setting up a limited liability company instead.
In a limited liability company, you and the business are considered legal entities, and you only risk losing the money you’ve invested in the business. You’re also not liable if your company is sued. However, there are more rules and regulations and requirements if you run a limited liability company.