Advantages and Disadvantages of a Sole Trader Business [2025 Guide]

Becoming a sole trader is one of the most popular ways to run a business in the UK. With minimal paperwork, complete control, and simple tax requirements, it’s easy to see the appeal, especially if you’re striking out on your own for the first time. 

But is it the right fit for everyone?

This guide explores all aspects of being a sole trader, including the advantages, disadvantages, risks to your personal assets, how taxes work, and the types of people who tend to thrive in this business model.

What is a sole trader?

In legal terms, a sole trader is an individual who owns and operates their business entirely on their own. There’s no distinction between the person and the business in the eyes of the law. 

You’re responsible for everything: from sales and customer service to taxes and debts.

You don’t need to register with Companies House. All that’s required is registering with HMRC as self-employed, usually through the Self Assessment system. This simplicity is one of the main reasons people choose this route.

🔎 Read more about how to register as a sole trader in the UK in our blog!

Why do so many people in the UK choose sole trader status

As of 2025, there are nearly 2.9 million sole proprietorships across the UK, making them the most common business structure in the country. The appeal is especially strong for freelancers, tradespeople, delivery drivers, and creatives, but you’ll also find consultants, small retailers, and fitness professionals among their ranks.

For many, it’s about lifestyle. Sole traders value independence. There’s no boss, no board, and no bureaucracy.

But what works well in one phase of your career may not suit you forever. That’s why understanding the full picture – advantages and disadvantages – is essential.

Advantages of being a sole trader in the UK

✅ Starting a business is fast and straightforward

When you decide to go it alone, you can get up and running in a matter of hours. There’s no need to file incorporation documents or appoint directors. A quick registration with HMRC and you’re officially self-employed.

That ease is ideal for anyone who wants to test a business idea without spending weeks on setup.

Example: If you’re a graphic designer, you could start freelancing with just a laptop and a few online platforms, without needing to register a company or pay incorporation fees.

✅ You control every business decision

As a sole trader, you have direct control over your business operations and can make decisions quickly without needing formal approval from others. This autonomy allows for flexibility to adapt your business as needed. 

While limited companies also offer significant control, especially for owner-managed businesses, sole traders benefit from a simpler decision-making process with fewer formalities.

If you want to raise prices, change suppliers, switch services, or even close down entirely, you can do so without the need for board meetings or shareholder resolutions. This streamlined approach is a major reason many sole traders report high job satisfaction.

✅ You keep all the profits

As a sole trader, all profits your business makes (after tax) go directly to you – there’s no need to share income with other business owners or shareholders. This straightforward approach means your personal effort is closely tied to your financial reward.

In contrast, if you are the sole director and shareholder of a limited company, the profits belong to the company as a separate legal entity. You then extract these profits primarily through a combination of salary and dividends.

While you are entitled to 100% of the available profits as dividends if you are the only shareholder, this process involves specific administrative steps, such as holding directors' meetings (even if you are the only one) to declare dividends and preparing dividend vouchers. Dividends can only be paid from available profits after Corporation Tax and other liabilities have been paid, and while the company doesn't pay tax on dividend payments, shareholders may pay Income Tax on them above a certain threshold.

Many limited company directors opt for this method as it can be more tax-efficient than taking a large salary. The key distinction is the formal process of profit distribution and the separate tax implications for the company and the individual, unlike the direct retention of profits by a sole trader.

✅ You face lower ongoing costs

Sole traders aren’t required to file annual accounts to Companies House or maintain complex corporate records. Accounting and admin are simpler and cheaper.

While you’ll still need to track income and expenses accurately, the burden is lighter than what limited companies face.

✅ Tax is simpler (at least initially)

As a sole trader, you submit a Self-Assessment tax return annually and pay tax on your profits as personal income. There’s no corporation tax or dividend tax. You can also deduct business expenses from your income to reduce your tax bill.

You only need to register for VAT if your turnover exceeds the threshold (currently £90,000), which means many small businesses can avoid the extra paperwork entirely.

✅ Easier to build client relationships

Because you are the business, customers deal with you directly. That creates a personal connection, often leading to better customer loyalty and trust.

In sectors like trades or personal services, this personal touch can be a real competitive advantage.

Disadvantages of being a sole trader in the UK

❌ Your personal assets are at risk

This is perhaps the single biggest drawback: there is no legal boundary between your business and your personal finances. If you’re sued or go into debt, your house, car, and savings could be seized to repay creditors.

Example: If a client sues you for breach of contract and wins, and your business can’t cover the damages, your personal property could be at stake.

This liability also applies to unpaid tax. HMRC has broad powers to collect debt, including using enforcement officers to seize assets.

❗Mitigation options: Many sole traders take out public liability or professional indemnity insurance. Others switch to a limited company structure once the business grows.

❌ Building trust with suppliers or clients can be harder

Some businesses are hesitant to work with sole traders, especially on large contracts. They may assume your business is less stable or harder to scale. That can make it difficult to establish trade credit accounts, secure financing, or win bids.

The perception of professionalism, fair or not, can be lower than with limited companies.

❌ You may struggle to raise finance

Without shareholders, equity, or audited accounts, it’s tougher to attract investment. Banks are often wary of lending to sole traders because they see more risk and less transparency.

You can’t issue shares or offer equity in your business, which limits your options for raising capital.

Sole traders often have to rely on personal savings, credit cards, or loans based on personal income rather than business performance.

❌ Fewer tax planning tools

While tax is simpler, you don’t have access to some of the strategies available to company directors, like paying yourself through a combination of salary and dividends.

As a sole trader, you’re taxed on all profits at income tax rates. There’s no way to shelter income through dividend taxation or retain profits in the business for future use.

You can still reduce your bill through business expenses, capital allowances, and pension contributions, but advanced planning options are limited.

❌ You do everything yourself

Even if you outsource tasks like bookkeeping or design, the responsibility ultimately falls on your shoulders. You’re the manager, marketer, customer service rep, and finance director – all at once.

There’s no paid sick leave, no paid holidays, and no team to delegate to unless you hire contractors.

This workload can quickly lead to burnout, especially in seasonal or high-demand industries.

❌ Business ends with you

If you want to sell the business, retire, or pass it on, doing so can be complicated. Unlike a limited company, there’s no separate legal entity to sell or transfer.

If you stop working, the business usually stops too.

How personal liability works for sole traders

Let’s get specific. If your business owes money or loses a lawsuit, creditors can:

This lack of legal separation is a serious financial risk. It’s why some sole traders convert to limited companies once turnover increases or they begin working with higher-risk clients.

However, you can reduce risk through:

Tax advantages and reliefs for sole traders

Sole traders pay tax through the Self Assessment system. Here’s what that means:

🔸 Income Tax instead of Corporation Tax: You only pay tax on your profits as personal income. There’s no separate tax on the business entity, which keeps reporting requirements simpler.

🔸 No double taxation: You don’t pay dividend tax on money you take out of the business because it’s already taxed as personal income.

🔸 Claim business expenses:

You can deduct costs such as:

🔸 Loss relief: If your business makes a loss, you can offset it against other personal income, like employment or rental income, potentially reducing your tax bill in that year.

🔸Capital allowances: For larger purchases (e.g., vehicles, machinery), you can claim deductions over time to spread the cost.

Who becomes a sole trader in the UK?

The sole trader community is more diverse than you might think.

🔸 Age

Self-employment is highest among workers aged 65 and over. Many use it as a flexible transition into retirement.

🔸 Gender

Around 2.8 million men and 1.5 million women are self-employed. Women-led businesses account for 23% of all SMEs and are growing steadily, especially in personal services, design, wellness, and care sectors.

🔸 Regional trends

London has the highest rate of self-employment at 16.5%, well above the UK average of 13.1%. Urban centers tend to attract more freelancers and contractors, while rural areas often see more agricultural sole traders.

What influences job choice among sole traders?

Several factors affect the popularity of certain jobs among sole traders:

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Do sole traders want to grow?

Surprisingly, most don’t. Approximately 70% of sole traders report a preference for remaining small.

Why?

Is it worth being a sole trader?

There’s no one-size-fits-all answer. Being a sole trader offers freedom, simplicity, and full control, but it demands personal resilience, financial caution, and long-term planning.

Ideal for you if:

But reconsider if:

Many business owners start as sole traders and switch to a limited company later as their goals evolve.

So, is it worth it? Absolutely, for the right kind of person, at the right stage in their journey.

How ANNA supports sole traders where it really counts

Running your business solo doesn’t mean doing everything alone. ANNA gives sole traders practical tools that actually reduce the stress of managing money, without drowning you in jargon or admin.

Alternatively, if you wish to take the next step and register as a limited company, ANNA can assist you for free.

Choose from flexible pricing plans tailored to your needs:

Want to go further? Add services like VAT registration, PAYE setup, confirmation statement filing, and more – all available during signup.

Most business apps make life more complicated. ANNA does the opposite, especially for sole traders who just want to get paid, stay compliant, and keep things moving.

➡️ Open an ANNA account now – and let the app handle the boring bits while you run your business your way.