Information About Sole Traders

Sole traders can work alone, or they can hire employees.

A sole trader is someone who owns and operates an unincorporated business. More commonly known as a sole proprietorship, sole trader businesses include freelance workers, plumbers, hair dressers and anyone else who works for themselves, not as employees of a company. Before beginning business as a sole trader, it is important to understand there are some advantages and disadvantages to setting up a business in this format.

Sole Proprietorship

A sole proprietorship is owned and operated by just one person. If you own an unincorporated business with someone else, it would be a partnership, not a sole proprietorship. As a sole proprietor, the government makes no distinction between you and your business. Sole proprietors are liable for all taxes and liabilities incurred by their business.

Advantages

There are two distinct tax advantages to setting up your business as a sole proprietorship. First, it allows you to avoid double taxation. If you were to incorporate your business, your personal income is taxed separately from any money your corporation should earn. Second, as a sole proprietor, you can deduct business expenses against any other income you earn, even if that income is unrelated to your business, such as capital gains on your investments or income from a rental property.

Disadvantages

Because the law does not make a distinction between you and your business, sole traders are unprotected from business liabilities. If a corporate business files for bankruptcy, creditors cannot touch the personal assets of the corporate owner. If your sole trader business fails, creditors can go after your house and other assets even if they are unrelated to your business. Likewise, if your business is sued, the courts have the right to go after your personal assets in addition to your business assets.

Getting Started

Perhaps one of the biggest advantages to setting up your business as a sole proprietorship is the fact it is so uncomplicated. Setting up a corporation or a partnership can be costly and complicated. To get started as a sole proprietor, all you have to do is start working as a sole proprietor. For example, if you are a plumber by trade, you automatically become a sole proprietor as soon as you set up shop and start to work fixing pipes.

References

• IRS.gov: Sole Proprietorships
• PoznakLaw.com: Doing Business as a Sole Proprietor