What are the risks of running a business as a sole trader?

There are many advantages to running a sole trader business when compared with setting up a limited company, including reduced administration and simplicity of the registration process, but various risks also exist that could undermine your success if you choose to trade using this structure.

Personal liability

The biggest risk for any sole trader is the potential for personal liability for the debts of the business. There’s no distinction between you and your business as a sole trader, unlike limited companies that are separate legal entities from the directors.

In more detail, your personal liability as a sole trader is unlimited, which means you could ultimately face bankruptcy and lose your home in the worst-case scenario. Your personal assets would need to be sold to repay the business’ creditors if it failed and was unable to meet its liabilities.

Perceived lack of status

Public perception of a sole trader business is not usually as favourable as that of a limited company. Sole traders are often regarded as smaller businesses in general, and sometimes viewed as less professional than limited companies.

If professional credibility is important, you could risk a perceived lack of status by choosing to set up a sole trader. In fact, some businesses won’t deal with sole traders as they’re sometimes seen as a higher risk.

Limited finance options

Lack of funding could be a risk if you run your business as a sole trader, as banks tend to be less willing to lend when compared with limited companies. This could be due in part to the more detailed accounting procedures and reporting that limited companies must undertake, but sole traders also have to contend with reduced financing options as they aren’t able to issue shares to raise funds.

Potentially higher tax liability

Sole traders aren’t able to draw dividends as part of their remuneration as limited company directors can, and consequently may face a higher tax bill.  

Work-life balance

The risk of a poor work-life balance is particularly high if the sole trader business doesn’t employ any staff, and the business owner has to fulfil a wide variety of roles within the business. This can result in considerable stress and ill-health as there’s nobody to share the burden.

It’s advisable to seek professional assistance when deciding which business structure to use. Handpicked Accountants operate a referral network of reliable and fully qualified accountants around the country, and can recommend a finance professional based on practical knowledge of their working practices. Please contact our expert team and let us help you find the right accountant for your business.