Advantages and disadvantages of a sole trader business
More and more employees are seeking their fortune by becoming self-employed. This may be because setting up a business has become easier in recent years and decades, and the dream of self-fulfilment still lies dormant in many people. After all, who wouldn’t like to be their own boss and decide for themselves what they can and cannot do? However, whilst being a sole trader has its advantages, it also comes with a few drawbacks. We’ve listed a few of them for you here.
Starting with the company’s foundation
Advantage:
To set up your business, you simply need to register it with the Trade Register, the tax office and the employers’ liability insurance association. This can be done quickly – in some cases even online – and involves only minimal costs.
Disadvantage:
However, this is precisely why the sole trader is the most common form of business start-up in Austria. You should therefore be aware that you are by no means on your own out there and that you are constantly facing competition.
With regard to finance and capital
Advantage:
You do not need to contribute any minimum capital when setting up the business, nor do you need to have or provide any. This is a clear advantage over other forms of business incorporation. Another advantage is that all income belongs to you; you do not have to share it (provided you do not associate ‘sharing’ with tax – see the next point).
Disadvantage:
At the same time, as a sole trader, you are personally liable and must bear unlimited liability for the company’s debts. This liability cannot be limited – this poses a risk of which you should be aware.
What about tax and insurance?
Advantage:
There are a number of simplifications in tax administration for sole traders. For example, if annual turnover is below €600,000, you can avoid double-entry bookkeeping and use a simple income and expenditure account. Furthermore, if annual turnover is less than €35,000, you may be exempt from VAT (small business scheme). Calculating profit is therefore usually not particularly difficult and takes comparatively less time. The situation is somewhat more complicated when it comes to social security contributions, although these are also calculated on the basis of income thresholds. In summary, it is clear that, in this respect, receiving a net salary paid by your employer involves less work than having to pay all contributions yourself.
Disadvantage:
It’s a bit like electricity and heating bills. You’re categorised, and future income is estimated based on this assumption. If you exceed these expectations, higher taxes and levies become due. However, as it’s often the so-called ‘unlucky third year’ that hits new business founders, you should have already set aside the necessary capital. A good rule of thumb is to set aside half – that way, you’ll have enough reserves for higher tax arrears and advance payments; and if you don’t end up having to pay them, you’ll still be able to enjoy what’s effectively a self-earned bonus.
Free but on my own
Advantage:
You’re at the helm of your business, making all the decisions yourself; you’re your own accounts, marketing and IT department. No one criticises you; you can manage your own workload and choose your own clients. It sounds like an entrepreneurial paradise, but it’s a place where you might find yourself feeling a bit lonely at times…
Disadvantage:
If you make the right decisions and your business is running smoothly, you alone are responsible for that. But if it isn’t, the mistakes aren’t so easy to brush aside. As an employee, it might be easier to delegate responsibilities up or down the line, which is somewhat harder when you’re sitting alone in a crisis meeting with yourself.
However, this drawback must also be put into perspective, as being a sole trader does not mean you cannot seek help at any time and on any subject whatsoever. Whether it’s colleagues, tax advisers or other advisors, others have already made mistakes – it’s better to learn from theirs than to make your own. You can, of course, take the credit yourself.
