So you’ve decided to start your business. You’re about to use your God-given talent and skills to benefit humanity. Congratulations! But…and here’s the big ‘but’…what form should your business take? Should you operate on your own as a sole trader? Should you form a partnership? Should you incorporate a company? Is the company for profit, or not-for-profit? So many options…AHHHH!
In this article, we will examine the top 3 pros and cons of registering as a Sole trader!
Advantage #1 – Simplicity is key
The Sole Proprietorship is my lone ranger about to take over the world! The Sole trader or sole proprietor as it is sometimes called is attractive because of its simplicity.
As a sole trader you are the only owner of the business. On the positive side, it is very easy to register and start the journey. An individual who has never been involved in business before may choose the sole proprietorship because of the simplicity that it offers. Who wants to start a business for the first time through a barrage of regulation and bureaucracy right? You want things nice and simple.
In Trinidad and Tobago, the registration of a business as a sole trader is governed by the Registration of Business Names Act 1923, Chap. 82:85. Section 3 of the Act mandates that all individuals carrying on businesses are to be registered in the manner prescribed by that Act. You simply choose a name, making sure to follow the Act’s guidelines for name selection and approval, apply to have your business name approved, complete and sign the registration form, and pay the requisite fees.
Unlike the process to incorporate companies, there are no articles of incorporation to complete and no notices of address, directors, company secretaries or any other post-incorporation documents to file. The process to deregister the Sole Proprietorship is also quite simple as all that is required is the filing of the requisite notice under the Registration of Business Names Act 1923, Chap. 82:85.
Advantage #2 – Create employment opportunities
Further, as a Sole trader you are also free to hire employees if you wish. This is often good news to persons thinking about starting a business as a Sole Trader.
I’ve encountered many who believed that they have to do it all on their own. No, you don’t! You can engage workers and develop your delegating skills, which is going to be extremely important as you grow in business.
You also further contribute to the economy in which you operate by creating employment opportunities. (Just remember your obligations, as an employer, to the National Insurance Board and to the Ministry of Finance). Not to worry, a more detailed article on these obligations is coming soon!
Advantage #3 – Greater control
Those of us who have been in business for some time can attest to the fact that working with others can pose some risk to efficiency, performance and ultimately, progress. Egos get in the way and this leads to personality conflicts and dissension. As the saying goes “A house divided against itself cannot stand”. As a sole trader, you are the only owner of the business and you dictate how the business is run. Enjoy the successes but be ready to accept the responsibility of the losses as well.
Disadvantage #1 – Unlimited liability for the business’ debts.
It’s not all a bed of roses for the Sole trader though, and here comes what may be the most important bit of information that existing sole traders or even those thinking of registering as a sole trader should know - There is no legal separation between you as the owner and your business, therefore, the owner may be held personally liable for the debts of the business.
In Company Law, there is a doctrine called “the separate legal personality” of the company which states that the assets and liabilities of a company are separate and apart from that of its shareholders. It recognizes the company as its own legal person that can enter into contracts, sue or be sued, or commence and/or defend legal proceedings. There exists a “corporate veil” of separation, between the company and its owners.
In the case of the sole trader, this separation simply does not exist. It follows therefore that should things go south, which they often do, your personal assets are exposed to significant risk as they may be called upon to satisfy the full extent of the business’ debt.
Disadvantage #2 – Your business dies with you.
As you and your business are recognized as the same legal person, your business will naturally cease to exist upon your death. There is no continuity. This differs from a company which is considered a going concern given their separate legal identity. So if you’re thinking of leaving a legacy for the kids, then the sole trader option is probably not for you.
Disadvantage #3 – Raising funding is a hassle
Another disadvantage to consider is the reluctance of bankers to lend to sole traders, particularly small business owners. They consider such loans as ‘high-risk’ for reasons such as inconsistent cash flow, insufficient operating history, weak top-level management and low debt-to-equity ratios.
Let’s face it, a business is going to need an injection of funding in order to expand, so most sole traders just starting out will have to bite the bullet and invest their own money into the business during those first ‘boot-strapping’ years.
If you’re like me and you don’t have a lot of money and you don’t have a rich uncle, understand that the tortoise does in fact win in the end. Plan your finances well and do not expect overnight success. It simply does not exist. Slow and steady ALWAYS wins the race.
I hope this article answers some of your questions regarding starting a business as a sole trader and I pray the disadvantages stated here do not serve as a deterrent to any potential business owner. As a matter of fact, many professionals, be it attorneys-at-law, doctors, chefs, consultants and a host of others, opt to run their businesses as a sole proprietorship, with the full knowledge and understanding of the points raised in this article. Remember, knowledge is power and an informed decision is a wise decision!
Coming up next…The Partnership!
For more information on registering businesses or incorporating companies, visit www.bayleysconsultingservices.com
Ceronne Bayley is the Lead Corporate Governance Consultant of her own consulting firm, Ceronne Bayley’s Consulting Services. She has fifteen years’ experience working with and advising Boards of Directors of State Enterprises as well as profit and non-profit companies in the private sector.