THE REALITY OF WORKING AS A SOLE TRADER

(A) BUSINESS LIABILITY FOR DEBTS AND TORTIOUS ACTS A sole trader business is unincorporated, meaning that the law does not distinguish between the business owner and the business itself. The business owner’s liability is therefore unlimited. If he or she becomes insolvent and cannot (1) ….. debts when they (2) ….. due, then there may be no other option than to sell personal property in order to (3) ….. the necessary funds. This may result in the sole trader voluntarily taking steps to (4) ….. themselves bankrupt, which is the case in most instances of sole trader bankruptcy in the UK. However, if he or she fails to do so, any creditor can (5) ….. the court for a Bankruptcy Order. In the event of bankruptcy, a trustee in bankruptcy will take legal ownership of the sole trader’s assets, including the sole trader’s home, and has the authority to sell them to pay the creditors the sums owed. As well as his or her personal assets being at risk in this way, a sole trader must also be prepared for the consequences of having vicarious liability for certain acts and omissions of his or her employees. If a claimant in a case based on this principle makes a successful claim, the court may make an (6) ….. of damages and the sole trader, as the employer, will be personally liable for this amount.

(B) INSURANCE Given these risks, adequate insurance cover should be a priority for all sole traders. He or she may take out public liability insurance to cover the cost of any compensation claim which may be (7) ….. by any individual against a sole trader. This provides cover if a sole trader has intentionally or negligently caused injury or loss to that individual. They may also choose to take out professional indemnity insurance, which also covers the legal costs (8) ….. in defending any legal action and in addition covers any alleged breach of the sole trader’s professional duty. For example, where a sole trader has intentionally or negligently provided harmful advice. If a sole trader has employees, employer’s liability insurance is a legal requirement to ensure compensation can be paid to any employee who sues for a job-related injury or illness.

(C) TAKING LEGAL ACTION AGAINST A SOLE TRADER There is a pre-action protocol which sets out how sole traders can be pursued for the payment of a debt. The procedure applies to any claim for non-payment of a debt made against any individual, including any sole trader. It allows, for example, a relatively long period of time to be allowed before court proceedings can be issued, thus giving sole traders time to reply to and defend any claim. In addition, in a Particulars of Claim, the claimant needs to provide a detailed explanation of the circumstances of the claim and a comprehensive breakdown of any debt or debts owed. This is markedly different to the procedure of taking legal action against any other type of business, such as a limited company, where less information is needed at the initial stage of starting legal action and the defendant has less time to reply before court proceedings can be issued.

(D) THE REALITY OF WORKING AS A SOLE TRADER The information below is an edited extract from an interview with a sole trader published by The Guardian newspaper.

Chasing invoices, juggling family life and dealing with clients who expect the world for a pittance – all these are part of the daily grind for a sole trader. According to the government’s business population estimates, there are now 3.3 million sole traders in the UK, accounting for more than 60% of all private businesses.

Leon Brown, owner of freelance software and learning tools company Nextpoint says: “When the economy crashed, a lot of companies cancelled projects and avoided using external contractors to reduce their costs. This meant that there was less work around and also more contractors competing for the same jobs – a double whammy.” He had to learn not to rely on “just one type of income any more”, so he expanded his services to include writing, tuition and e-learning. But what does he dislike the most about being his own boss? “I hate paperwork,” he says. “It’s always daunting to have to create invoices and do form filling such as the Annual Tax Return. This is something I wouldn’t have to worry about if I were employed by someone else, but it’s necessary if I’m going to get paid for the work I’ve done.”

IPSE, the Association of Independent Professionals and the Self-Employed, warns that the pitfalls of being a sole trader include being personally liable for any debts incurred in the running of a business, including lawsuits. This means that personal assets, such as a home, are potentially at risk.