I run a consulting business generating around £80,000 in annual revenue, with expected net profits of approximately £60,000 after expenses such as software, marketing, and insurance. I anticipate growth over the next 2–3 years, with turnover potentially increasing to £120,000–£150,000 and the possibility of hiring 1–2 employees. I am currently operating as a sole trader, but contemplating forming a limited company. A key concern is protecting my personal assets from business liabilities, as well as improving tax efficiency and supporting future growth. I am also aware that incorporating a company would involve additional administrative and compliance responsibilities. What are the main tax advantages and disadvantages of operating as a sole trader versus a limited company? 

Arthur replies: 

A key factor here is how much money you annually need to withdraw from your business in order to live. If you need all your business profits to fund your lifestyle, running your business through a company will have a disadvantage, because your company will pay corporation tax on its profits, and you will pay dividend tax on the money you take out of the company. This combination could result in you paying more annual tax on your business profits than if you were a sole trader. A company has the advantage of limited liability, and usually lower National Insurance contributions costs. A company also usually has the disadvantage of greater compliance and administration costs.