This is a question we get asked all the time. There are pros and cons to both trading entities, so it is not always a simple answer. We have given you a synopsis of the facts to consider.

A Sole trader is the simplest form of business structure available if you want to be self-employed. It's an individual trading under their name or a business name, and they are personally liable for all the business risks. At lower levels of activity, being a sole trader is a perfectly acceptable form in which to trade.

Advantages:

• Simple to setup
• Low maintenance costs – no formal filing requirements apart from a tax return

Disadvantages:

• If your business become insolvent, creditors will be able to access your personal assets (including your home) to obtain payment of their debts.
• In the same way, personal assets can be put at risk if third party claims cannot be met by insurance or business funds.
• At higher levels of profitability, it will in most cases pay to incorporate your business to save tax.

A Limited Company is a separate legal entity owned by its shareholders and managed by its Directors. In most small LTDs, shareholder and directors are the same person. Directors are employed by their LTD, they are not self-employed. LTDs are required to pay Corporation Tax on their profits, not income tax.

Advantages:

• Provides a legal structure with a set of rules
• A LTD structure provides the shareholders, (the owners),with limited liability – their personal assets are protected
• If a business is profitable, it is likely that an LTD structure will reduce taxation. Director shareholders can apply a mix of salary and dividend payments, thus saving national insurance, and any retained profits will be taxed at the lower Corporation tax rate. Compare this to an unincorporated structure, sole traders or partnerships, where all the business profits are taxed at Income Tax rates whether the profits are taken out or retained in the business.

Disadvantages:

• More complex tax filing is required, the company will have to submit accounts and a Corporation tax return, and the directors will be required to file a tax return
• As well as filing accounts with Companies House, LTDs also have to keep their records of shareholders and directors up-to-date. This is facilitated by the filing of an annual confirmation statement.
• Directors/shareholder of a LTD will still run the risk of complications if relationships break down. The formal dissolution or liquidation of an LTD can be an expensive affair. 

If you are contemplating your options, for a new or expanding business venture then do give the KFS team a call before making a final decision. Alternatively, you can download a free more informed guide called ‘Business Structure’ from the Factsheets menu.