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The business structure dilemma


The business structure dilemma

The problem of what structure is best suited to your fledgling business is an important one that many budding entrepreneurs may not have anticipated when they decided to start their own company. Or, perhaps you’ve been operating as a sole trader for a few years and you’ve been toying with the idea of incorporating your business.

Either way, picking a suitable business structure presents a dilemma for businesses of all shapes and sizes.

Unfortunately there is no business structure-by-numbers to call upon. There are a lot of determining factors that you will have to consider including:

·         financial resources

·         market

·         expertise

·         priorities

·         aspirations.

Sole trader or limited company?

According to government data released in October, sole traders and limited companies accounted for 92% of the UK’s private sector at the beginning of the year. If you’re looking to set up a business or change an existing one you’ll likely choose one of these 2.

Here are the top 3 pros and cons for sole traders and limited companies:



Sole traders

Limited Companies


Simple administration:

Filing accounts and paying taxes is comparatively simple for the self-employed. For many, this involves sending one self-assessment return each year but this may extend to filing VAT and payroll returns depending on your circumstances.

Limited liability:

Directors’ assets are separated from company assets in a limited company, reducing the amount of personal risk should your finances take a turn for the worse. However, banks may still require personal guarantees from directors before they issue loans.

Cheaper costs:

There are no start-up costs or company formation fees to pay when you set up as a sole trader.

Tax planning:

Better tax planning opportunities that help company directors lower their national insurance and income tax exposure mean that they usually pay less in personal tax than their self-employed counterparts.

More privacy:

There are no obligations for the self-employed to make their business information available to the public.


Incorporated businesses are viewed as more trustworthy by banks and investors. Banks are more favourable to lending to limited companies and any loans you take out can be secured with a floating charge. Investors are also more likely provide capital for limited companies, making it easier for you to benefit from private equity investment.


Tax planning:

The self-employed don’t have as much room for manoeuvre when it comes to tax planning and most pay comparatively more in taxes than company directors.

Additional costs:

Compliance is more costly for limited companies.  Additional administration, statutory audits and Companies Act compliance will see significant sums added to your balance sheet.

Unlimited liability:

As a sole trader, you will shoulder all the responsibility for repaying back debts, potentially placing your personal assets at risk.

Additional administration:

Running a limited company is inherently more complicated than setting up as a sole trader. As well as the extra returns you’re expected file, you must ensure you’re fully compliant with the Companies Act and you may be expected to conduct an annual statutory audit.


Sole traders can appear less professional in the eyes of lenders, which makes attracting private equity investment or bank finance more challenging.

Less privacy:

Unlike the self-employed, limited companies have a statutory obligation to make certain information about the business public, including its accounts.



Caution: dividend tax changes ahead

If your decision is hinging upon the ability to use dividends in your tax strategy, it’s vital that you keep in mind that dividend taxation rules will be overhauled next April. Although a £5,000 tax-free allowance will provide some benefit when it replaces the tax credit system, higher tax rates could render the tax planning advantages a little less favourable.

 Speak to our one of advisers to find out how the changes could affect your plans.


Get professional advice

If you’re struggling to decide on a suitable structure for your new business, remember that you are not on your own. Choosing whether to seek professional help during your business’s infancy can define its future, and finding someone with the right expertise is invaluable.

Our accountants and business advisers can help you:

·         choose a business  structure that’s right for you

·         develop a comprehensive business plan

·         apply for start-up finance

·         register and communicate with HMRC, Companies House and any other relevant official organisations.


Contact us on 01628 631 995 or email geoffk@knightandcompany.co.uk to book an initial consultation.