Firstly to be a sole trader you need to be willing to work on your own, have the sufficient confidence in yourself to make your own decisions and to be able to turn your hand to almost anything, because as a sole trader you will probably have to serve customers, decide what equipment needs to be bought, deal with suppliers and keep up to date business records which have to be dead accurate. As you can imagine this requires a large range of skills and a huge amount of flexibility.
Secondly sole traders have to be accustomed to working hard as being a sole trader is not the easiest thing in the world, you will also have to be prepared for a huge amount of stress. Every single one of the decisions that need to be made about the business are only yours, so therefore if you get a decision wrong its entirely your fault, but on the other hand, if your business succeeds thanks to the decisions you have taken the feel of success and the rewards are entirely your own as well.
Thirdly, to become a sole trader you need to have a high level of self discipline because you don’t have a boss, no one will tell you what to do so effectively you are your own boss. This can be thrilling because you can make the decision to decide what is going to happen. This means that you have to motivate yourself to get things done, like you will have to organize everything properly and use every second of the day efficiently.
One of the main advantages of being a sole trader is that it’s tremendously easy to start up in business. This is because unlike starting other types of business, you do not need to fill out any kind of forms and there is no need for you to register with anything or anyone, you just begin trading. If you suddenly decide to be a sole trader (gardener, hairdresser, plumber, electrician, etc.) you can get started right away, but it will probably be useful if you get some training first. Another advantage of being a sole trader is that it can be more enjoyable for some people. People like being their own boss and not having to obey orders and/or instructions from their superiors can also be an advantage. They like the sense of freedom they get after being able to make their own decisions, to choose where and when they have to work, what they have to do and how they have to do it. The last advantage is that you can make decisions quickly as you do not have to discuss the decision that is to be taken with anyone, or get permission to take the decision, this is an advantage because it can be tremendously motivating.
Although being a sole trader can be very satisfying, it also comes along with many and very taxing challenges. Making all the decisions on your own can be very thrilling but you also carry all the responsibility. If you are working as an employee for someone else and there is a serious problem you can always hand over the problem for solving to them. Being a sole trader can therefore be a bit lonely, occasionally some people can’t cope with all the stress by them selves, these people can also find the long hours involved in being a sole trader very tough. This is most likely to be an issue in the early years while you are working hard to build up enough business. At the beginning a sole trader will probably have to work very long hours every week and you will not be able to take much time off for holidays as you cannot afford to take the risk of closing the business as this could lead to a loss of customers.
Another disadvantage and constraint of being a sole trader is raising finance to set up and expand the business. You generally have to rely on your own money or money lent to you by friends and family (plus the money from the business itself once it set up and running and producing some form of income. Of course it’s possible to take out a bank loan or other financial institutions but they often charge small businesses quite a high rate of interest rates because the financial institution wants to cover itself against the businesses risk of loss.
Being a sole trader can also be quite unsafe if anything goes wrong because sole traders have unlimited liability, this means that the owners are personally responsible for the debts of the business and there is no limit to this responsibility; this in turn means that they could have to sell there personal belongings to pay back there debts. But if there is no such complications the owner gets to keep all profits that are made.
There are two different types of company, private limited companies and public limited companies. My chosen business, Cheveley Park Stud, is a private limited company.
A company is a type of business owned by shareholders. A shareholder is an owner of an organisation. There are two types of shareholders but an ordinary shareholder has one vote per share and receives a dividend if the company makes a profit each year. The second type of share is a preference share, owners of a preference share get paid a certain amount of money each year whether the company makes a profit or not. A dividend is a payment from the company to its shareholders. Each share that is owned represents a share of the company, therefore the more shares one person owns the larger the percent of the company that belongs to him.
To set up a company you have to fill out various forms, applications and documents at Companies House, this process is generally known as incorporation. Once a business has been incorporated, a business has its own legal identity, apart from its owners. The company can own equipment, land, property and other goods in its own right and is responsible for its debts. If the company fails to succeed the share holders can lose all the money they invested in the business when they purchased there shares but they cannot lose any more money than this. This is because a company has limited liability, which means that the company is responsible for the debts it has but the personal belongings of the share holders are safe because there is a maximum limit to the amount of money for which they are liable. This is the complete opposite from a sole trader, who has unlimited liability and could lose everything if the business had any financial problems.
Having the advantage of limited liability is essential for the companies to raise money by selling shares. Without this advantage of having limited liability investors would be far less likely to purchase shares because of the risk involving there personal belongings. It would mean giving out money to others and having everything you have earned put at risk. With the advantage of limited liability, potential investors know exactly the maximum amount of money they can lose.
One of the problems of setting up a company is that the company has to pay an independent accountant (auditor) annually to have the companies accounts checked. These accounts unfortunately have to be made public, so people can see the revenue and the profits/losses of his business as well as what the business currently owns.
Table of advantages and disadvantages of being a company.
By investing in a company, share holders become the owners of the business, meaning that if the business is successful, the value of there shares will probably increase in value. Share holders should also receive a share/dividend of the profits the company makes each year. The larger the profit margin a firm has the greater the dividends that ordinary shareholders get paid. Each year the company will announce how big or small the dividends are per share, the more shares one person owns, the more dividends they receive in total.
Share holders can also influence the policy of the business. Most types of shares give their owners voting abilities. In general each share is worth one vote. So by buying more shares people can have a greater influence of what happens in the business. If someone owns 51% ore more of the business they are in complete control of the business and therefore decides what the firms policy is.
Most company shares are owned by financial institutions such as banks and building societies, these organisations buy shares to try and make a profit through the dividends that they receive and by selling the shares at a higher price later on. They can then pass on some of their profits to there own investors.
Private limited companies are followed with ‘ltd’ after their name. These companies are owned by shareholders and the owners can place restrictions on who can and who can not purchase shares. Many private limited companies are owned by families or a group of friends who limit the sale of shares to other members of the family and friends, making sure that outsiders do not becoming implicated. Owners of shares in private limited companies can not advertise there shares for sale because they have to sell them privately.
Public limited companies have ‘plc’ after their names. There are owned by shareholders but they differ from private limited companies as restrictions can not be placed on the sale of shares. Shareholders in public limited companies can advertise and sell there shares anyway they want. This can lead to problems if other companies start buying shares in the company in an attempt to gain control over it.
