5 Telltale Signs Your Sole Tradership Is Ready To Become A Small Business

As a business owner, several different legal structures are available to you. Many new entrepreneurs choose to start out as a sole trader. As the name suggests, being a sole trader means that you’re the sole owner of your business. While this can provide the necessary flexibility for smaller enterprises, many reach a point where the cons start to outweigh the pros.

The solution for you at this point might be to transform your sole tradership into a small business. In this article, we’ll go over some signs that you’re ready to make the transition.

1. You’re Facing More Liabilities

Business always involves risk. As a sole trader, you will have to bear full personal liability for your company. This can get risky, especially as your business continues to grow.

An added amount of liability is a signal that your sole tradership is ready to become a small business. Making the legal shift also gives you access to various types of insurance for small business needs. For example, small businesses can secure public liability insurance, which protects them against various claims from clients and consumers.

Besides granting you access to more comprehensive insurance, another advantage of becoming a sole proprietorship is that it reduces the amount of personal liability you need to bear for your business. This allows you to protect your personal assets in case your business runs into choppy financial waters. Transitioning to a corporation or a limited liability company shields you against many of the personal risks of running a sole tradership, especially as your business grows.

2. You’re Dealing With Rising Self-Employment Taxes

If you own a sole tradership, you are considered self-employed. This means that the money your company earns will be taxed as personal income. This can be helpful when you’re starting out and not earning very much, although you’ll quickly move up the tax brackets as your revenue grows.

Taxation is a big reason why you might want to change your business’s legal structure. When you become a small business, you’ll be charged corporate tax at a standard rate. You’ll also be able to take advantage of many small business tax deductions while your business remains below a certain size.

Business taxation is a complex topic. We highly recommend speaking with a legal professional to help determine whether or not becoming a small business would be financially beneficial for your sole tradership.

3. You Require A Larger Team

Sole traderships are perfect for new businesses with small teams. However, as the workload increases, you’ll need to hire more employees. When your team reaches a certain size, a sole tradership structure might not allow you to attract the top talent you need to drive your business forward.

Besides being a potential roadblock to hiring the best employees, being a sole proprietorship also puts you at risk of legal action from your current workers if there are disagreements. Because you’re independently liable for your business, this could affect you personally.

Running your company as a sole proprietorship is great if you’re working alone or with a handful of employees. As you continue to add to your team, however, turning your enterprise into a small business can be more beneficial.

4. You’re Facing External Pressure To Grow

For your business to keep growing, you’ll probably require outside investment along the way. This can be difficult to acquire as a sole trader. Often, venture capitalist firms and individual investors are reluctant to pour significant amounts of money into sole traders because of the lack of distinction between you and the company, and a perceived lack of growth potential. It can also be harder to get bank loans for these reasons.

The answer to this issue is to become a small business. As a limited liability company or a corporation, investors are more likely to provide capital. This allows you to pay for expenses like employee wages, marketing and rent. By transitioning to a small business, you can open yourself up to more investment opportunities, paving the way for future and ongoing growth.

5. You’re Receiving Increased Revenue

Finally, the ultimate sign that your sole tradership is ready to become a small business is that your revenue is on a steady upward trajectory. A sole tradership structure is perfect for entrepreneurs who are just starting out or don’t aim to upsize past a certain point. For all the reasons we’ve outlined above, however, a different business structure might be more suitable for you if your enterprise is earning more.

Of course, there’s no defined point at which your figures will dictate you absolutely need to shift to a small business. This will depend on other factors like your business goals, your industry and your appetite for risk. Ultimately, only you can decide when, or if, it’s the right time to take this step.

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As a business owner, it’s probably your goal to grow your enterprise as much, but not necessarily as fast, as possible. Maximising your company’s potential while remaining as a sole trader can be difficult for several key reasons. If you’re starting to run into some roadblocks, you might want to look into turning your enterprise into a small business.

We’ve just gone over five telltale signs that your sole tradership is ready to become a small business. If you think these describe your business and financial situation, consider the process of making this change now.