A sole trader is the simplest form of business organisation. There is one owner, who has complete control over the decision making and running of the business. While many sole traders are indeed people working on their own, a sole trader can employ others to help run the business. Since a sole trader business in unincorporated, any people working in the business, apart from the owner, are actually employed by the owner. Setting up as a sole trader is very easy, as there are few legal formalities to go through.
The sole trader must tell the Inland Revenue that he or she has set up a business and is self-employed. Details of any profit or loss made by the sole trader during the financial year must be given to the Inland Revenue annually, together with balance sheet, if there is one. This is so that the Inland Revenue can charge income tax on the sole trader's profits, adjusted by certain items. A sole trader must also keep employment records in respect of any employees. Any business name used by the sole trader has to comply with the Business Names Act 1985.
This allows a business to trade under any name, as long as the name is not intended to mislead customers into thinking that it has a connection with any other business or government department if not such connection exists. It is also illegal to use terms such as 'royal' or 'international' without the permission of the Secretary of State for Trade and Industry. Setting up a sole trader can be the least expensive way of starting a business. Many sole traders start with a minimum of capital or finance.
They often begin by operating from small premises, such as a shop, small workshop or office unit, or even from the home of the owner of the business. Starting out as a sole trader is the most common way of setting up a business. There are few sources of finance available to sole traders, apart from the personal funds of the owner and any profits the business makes. This is partly because sole traders are usually small businesses and partly because they have unlimited liability.
Many sole traders take out a bank loan to help finance the start-up costs of the business. These include the costs of premises and equipment, and also raw materials, labour and other running costs that have to be paid before the business starts receiving sufficient revenue from sales of its goods or services. Because the business affairs of a sole trader are legally the same as his or her personal affairs, however, any loan is in effect a personal loan to the owner of the business.
The lender will probably require the loan to be secured on the owner's personal property, for example, in the form of a mortgage on his or her house. Obviously there is a limit to the amount of money a sole trader can raise in this way, and the lack of availability of other sources of funds means that sole traders usually start as a small business and do not have real opportunities for growth. There is an advantage to being a sole trader, however, which can often give a competitive edge over a larger business.
In a small business, the owner and decision maker usually maintains close and direct contact with customers. He or she is aware of any changes in customer needs and demand and can respond quickly, whereas in larger organisations it can take longer for the decision makers to become aware of and respond to these changes. Typical sole trader businesses are local independent shops, plumbers and similar trade's people, freelance artists and other self-employed people.