What Are Sole Traders?
A sole trader is the most common, simplest and easiest type of business to set up. Often referred to as a sole proprietorship, a sole trader has only one owner/operator who is responsible for all business decisions and transactions. This business form is unique because the owner/operator has no legal distinction or separation from the business; this individual enjoys complete control of the business, rights to all profits, as well as responsibility for all debts and liabilities.
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Significance
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Sole traders are the most widely used business form in the United States. According to a 2008 study performed by Presidio Graduate School, "73 percent of all businesses are sole proprietorships, 19 percent are corporations, and 8 percent are partnerships." When starting a business, it is crucial to know and understand the advantages and disadvantages of a sole trader business compared to other business forms.
Requirements
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The required paperwork and formalities are much easier and quicker for sole traders compared to limited liability companies or corporations. Sole traders have only have a few formal business requirements: the use of ethical accounting practices, complying with local regulations and zoning ordinances, as well as state specific licensing requirements.
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Advantages
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Sole traders enjoy the following benefits: full control of business, full financial responsibility, less taxation, and the company's financial information is kept private. The owner's full control of the business results in quick decision making with no hidden agendas. The full control also gives the owner/operator the opportunity to sell or dissolve the company at any time, as well as the possibility of leaving it in a will. The full financial responsibility provides the incentive for extra motivation and effort from the owner. Sole traders avoid double taxation unlike corporations; corporations are taxed once on company profits and again on individual profits while sole traders are only taxed on personal profits.
Disadvantages
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The disadvantages of sole traders include unlimited liability, the onus to raise outside capital, over-reliance on one individual and a higher cost of doing business. It is hard for sole traders to get outside funding because they have a higher rate of bankruptcy compared to other business forms. Many sole traders rely too much on the owner/operator, leaving that individual with the pressure of long hours and the lack of available sick and/or vacation days. Sole traders also incur a higher cost of doing business compared to large corporations. Most sole proprietorships have a hard time buying in bulk and producing economies of scale. Economies of scale emerge when each unit price of production becomes cheaper when more total units are produced.
Types
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There are four common legal businesses structures in the United States: sole trader, general partnership, limited liability partnership and corporation. Owners of general partnerships, just like sole traders, are completely financially responsible and are only taxed once. Limited liability partnerships enjoy some liability protection and also avoid the double taxation of corporations. Owners and corporations are two completely separate entities: owners enjoy complete personal liability protection and corporations can last forever as a business entity no matter how long the owner is alive.
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