Sole Traders
Business: Cambridge International GCSE (2027 Exams), topic 1.4.1
Sole Traders
Every business needs a legal structure that defines who owns it. A sole trader is a single person who is the exclusive owner of a business. They can still have employees and the owner is entitled to keep all of the profits after tax, but is also personally liable for the business’ debts.
Unlimited liability
- Unlimited liability means that there is no legal distinction between the owner’s personal assets and the business’ assets.
- If the business cannot pay its debts, the owner may have to sell personal possessions.
- Such as their car or house to cover the debt.
- This is a key feature of sole traders and an important difference compared to other business structures such as limited companies.
Advantages
- They are the easiest type of business to set up.
- The sole trader gets to be their own boss.
- The sole trader decides what to do with the profit.
- It is easy to change the legal structure if circumstances change.
Disadvantages
- Unlimited Liability means that there is no legal distinction between the sole trader’s assets and the business’ assets.
- It can be hard to raise finance. Banks often see sole traders as riskier.
- All the responsibility for making business decisions is yours. Having someone to share decision making with can improve performance.
- It can be harder to retain (keep) good employees as they aren’t necessarily given a share of the profits.
Test yourself on Sole Traders
What is the term used to describe the lack of distinction between a sole trader's assets and their business' assets?
Which of the following is a disadvantage of being a sole trader?