A limited company is its own legal entity, so as a shareholder your liability is ‘limited’ (hence the name), as a sole trader there is little distinction between you and the business.
However, the biggest disadvantage to being sole trade is that any business debts become your debts and your personal assets can be taken into account if things go badly i.e. house, car etc
With a limited company personal assets are not exposed and you can only really ever lose what you have put into the company. The other major advantage of having a limited company is for tax purposes.
WHEN IS THE RIGHT TIME TO FORM A LIMITED COMPANY?
Most entrepreneurs who go into business usually start as sole traders for the sake of simplicity. As a sole trader your options in terms of how you handle your income is limited, money arrives in your account and you pay tax on it.
As a director of a limited company you have more options, your income will actually be the revenue of the limited company and the most tax-efficient way to take the money from the company is usually to take a low regular salary and then dividends (which attract a lower tax rate). As a limited company, you will also pay corporation tax on your company profits, rather than income tax and
national insurance on your entire income.
There is a point where your earnings become can become so high that it will be so much more beneficial to have a limited company and it is advisable to discuss this with an accountant.