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Most people who work for themselves -- such as hairstylists, builders, plumbers and other freelance workers of various types -- would not be in business if they had to endure the complications and expenses involved in incorporating their small businesses. Operating such a business as a sole trader is simple and does not cost anything to set up, making it an important form of business ownership.
Sole Trader Basics
A sole trader business is also referred to as a sole proprietorship. As the name implies, it is a business owned and operated by a single person. If you own a business with a partner or if your business is set up as a corporation, it is not a sole trader business.
Establishing a Sole Trader Business
A sole trader business is very easy to set up. In order to become a sole trader, all you have to do is begin working. For example, if you you are a plumber by trade, fixing someone's pipes and collecting a fee for your services automatically establishes you as a sole trader. There is no paperwork to file, no contracts to sign and no partnership agreements to be drafted.
In addition to the ease of establishing a sole trader business, sole traders have two distinct advantages when it comes to taxes. First, as a sole trader you do not suffer from double taxation. If you set up your business as a corporation, you will have to pay corporate taxes on business profits and personal income tax on any money your corporation pays you. As a sole trader, the government does not make a distinction between your personal income and profits from your business. Additionally, as a sole trader you can deduct business expenses, which reduces your taxable income when you file.
The biggest drawback to setting up your business as a sole proprietorship is it leaves you personally exposed to business liabilities. The courts do not make a distinction between you and your business, so if your business is sued or goes bankrupt creditors are free to attach personal assets such as your house, even if they are not business-related.
Donald Harder has been writing financial-related articles since 2000 when he founded the firm Securities Research Services. He has worked as a speech writer for the U.S. Department of Justice and written white papers and studies for the U.S. Department of Housing and Urban Development. Harder holds a Master of Arts in international affairs from George Washington University.