Throughout the course of this assignment, the pros and cons of John Jones operating as a sole trader will be examined. Relevant literature will be consulted in order to gain an informed perspective upon this issue. The aim will be to provide as thorough an insight as possible into the benefits and pitfalls that are associated with being a sole trader.
There are a number of different ways in which operating as a sole trader is advantageous to John. Firstly, it enables him to be his own boss (Tasmanian Government, 2014). This allows him to go about his work in his own way without having to answer to anybody other than his customers.
Secondly, there are no specific legal requirements concerning the manner in which John has to set out his accounts (Canwell & Sutherland, 2008). This means that he does not have to waste time mastering a precise layout, which is beneficial given the large amounts of work that are currently available to him. It is one less complication for him to have to worry about.
In addition to these points, acting as a sole trader means that John gets to keep all of the profit that he makes (Fraser & Gibson, 2014). He does not have to share it with a partner and he does not have a boss who takes a cut. He is able to enjoy the full fruits of his labor.
It is easy for an individual who operates as a sole trader to wind up his business (Tasmanian Government, 2014). This means that if John decides that he can no longer cope with the workload of his plumbing business, he can cease operating without too much effort. It is also easy for somebody who operates as a sole trader to alter the legal structure of his business if his circumstances change (Tasmanian Government, 2014). This is particularly advantageous to John, as it is clear that his circumstances have changed and that he is getting more business than he used to get. It means that if he wishes to do so, he could easily adopt a legal structure that he feels will be better suited to the amounts of customers than he is now getting.
Another advantage of being a sole trader is that the individual in question has full privacy (Tasmanian Government, 2014). This means that John does not have to let a boss or partner know the full details of his earnings or the way in which he operates. Now that his business is significantly improving, it enables him to closely guard the secrets of its success.
However, there are also numerous different disadvantages to John operating as a sole trader. Firstly, potential clients might view his business as being less professional on account of the fact that it is not a limited company (Jacobs, 2003). Although he has currently managed to gain an extensive reputation, it is possible that he would have an even better reputation if he operated with a different legal structure.
It is also difficult for sole traders to raise money. Because they are unable to sell stock in their businesses, investors will not often invest in them. Banks also tend to be hesitant to lend money to sole traders on account of the perception that they lack credibility with regards to repaying loans if their businesses fail (U.S. Small Business Administration, n.d.). This could prove problematic for John, as it could limit the extent to which he will be capable of expanding his business. The fact that his reputation is spreading at such a rapid rate means that his business is prime for expansion. However, it will be difficult for him to facilitate this growth without the necessary levels of funding.
Sole traders are also faced with unlimited personal liability. There is no separation between John and his business, which means that he can be held liable for the obligations and debts of the company (U.S. Small Business Administration, n.d.). This means that if anything goes wrong then he could potentially face bankruptcy (Jacobs, 2003).
The fact that John is finding it difficult to cope with all of the work that is available to him on his own means that he would benefit significantly from employing other people. However, sole traders are also responsible for liabilities that are incurred due to the actions of their employees (U.S. Small Business Administration, n.d.). This means that taking on workers would significantly increase the risks that are associated with John’s business. It is impossible for him to predict every possible situation that could arise involving his employees. Therefore, the chance will always exist that something beyond his control might happen which will cause him to occur considerable personal losses.
In addition to these points, the fact that sole traders are in complete control of their businesses places a heavy burden upon their shoulders. It means that John does not have anybody except himself to blame for mistakes and failures (U.S. Small Business Administration, n.d.). This could be a significant source of stress, given the fact that his business is in a transitional phase in terms of popularity, which means that the situation is ripe for things to go wrong.
It can also be difficult for an individual to take vacations if he operates as a sole trader (Tasmanian Government, 2014). The fact that John is struggling with a large number of orders means that he could benefit from some time off every once in a while in order to de-stress. This might not be possible whilst he is running his business as a sole trader. Constant stress could lead to illness, which would mean that he had to take time off. This could potentially damage his business.
In conclusion, there are numerous different advantages and disadvantages to John operating as a sole trader. He has a large amount of control over his business, but there is also a substantial amount of risk associated with this legal structure. Whether or not he should continue to operate using it depends upon the extent to which he is willing to risk his personal funds on account of unforeseen circumstances. It also depends upon his ability to cope with stress and pressure. Ultimately, every business is different, so it is a matter of choice whether he alters his legal structure or not.
- Canwell, D. & Sutherland, J. (2008). Essential Business Studies for AQA. Haddenham, UK: Folens Publishers.
- Fraser, D. & Gibson, A. (2014). Business Law. London, UK: Pearson.
- Jacobs, A. (2003). Business Strategies for Freelancers and Small Businesses. The Write Stuff, 12 (1), 12-14.
- Tasmanian Government (2014). Sole proprietorship – advantages and disadvantages. Retrieved from http://www.business.tas.gov.au/
- U.S. Small Business Administration (n.d.). Sole Proprietorship. Retrieved from http://www.sba.gov