Sole traders

A sole tradership is the most simple form of business organisation.

There is a minimal amount of legislation to comply with compared to other business structures. However, unlimited liability means that the sole trader is personally liable for the debts of the business.

Nature of the organisation: it is the simplest form of business organisation.

• Governing law: there is less legislation to worry about than with other business organisations.
• Establishment procedure: establishment is very simple, involving more practical problems (such as finding a place to work from) than legal
• Finance: the ease of raising capital will generally be determined by the trader's personal credit.
• Continuity of existence: the business is tied to the trader and so dies with them.
• Limitation of liability: the trader is personally liable for the debts of the business.
• Control of the organisation: the trader owns and operates the business and makes all the decisions.
• Formalities: administration is simple and costs are low.
• Admitting new investors or participants: there is generally no problem in admitting new investors or participants, although certain professional bodies may impose requirements. If an investor or participant is admitted the nature of the business organisation may change.
• Selling the business interest: there are few restrictions on the ability to sell, but practical difficulties may arise because a sole tradership is so closely tied to the owner.
• Cessation of business: it is generally simple to cease to carry on a sole tradership and the profits and assets of the business remain with the trader.
• Tax implications: there are both positive and negative implications. On one side tax losses may be offset against the trader's other income. On the other profits from the business will be taxed at the sole trader's marginal income tax rate which may be higher than the business tax rate.

The main advantages of starting or acquiring a business through a sole tradership are:

• It is the simplest form of vehicle, with the least legal and administrative procedures and costs of implementation.
• The proprietor has full control of the business.
• The proprietor is entitled to sell or to discontinue the business.
• Discontinuance of the business requires minimum legal cost.

S ome disadvantages are:

• The proprietor has unlimited personal liability for debts and for negligence (eg employees' errors) committed while conducting the business.
• Success and continuance of the business are tied to the ability and health of the proprietor.
• Management skill is confined to that of the proprietor and the employees.
• Expansion and raising additional capital is more difficult than when more sophisticated vehicles are used.
• It is unsuitable when more than one person is involved in providing capital for and in conducting the business and each desires to share in control and management of the business.
•  If this vehicle is suitable for a particular client and business acquisition, some of its major disadvantages can be ameliorated. For example, many risks of loss (including for negligence) can be protected by insurance. Some assets can be removed from the reach of creditors, eg by leasing instead of owning them.
• People wanting to conduct their businesses on their own can also form a proprietary company.

Read about other company structures for tax purposes.