When Should You Start a Limited Company?

Limited companies have a range of benefits for contractors. But when it best to make the switch? Find out with our simple guide to starting a limited company.

For self-employed individuals looking to maximise their income, simplify their operations and increase the efficiency of their taxation practices, switching from operating as a sole trader to the director of a limited company can pose an attractive option. As well as reducing personal liability by separating the business from the individual, there are also plenty of other financial reasons why it makes sense to start a limited company in the UK.

But when is the right time to make the switch? The answer to that question cannot be simply defined in temporal or even fiscal terms, since the decision is one that must be made one a case-by-case basis and will differ depending on the unique circumstances of your business. Having said that, there are a few things to keep in mind if you’re unsure about starting a limited company.

Factors affecting your decision

Given that there’s no firm demarcation line when it makes sense to switch from sole trader to limited company, the decision when to do so will largely come down to personal preference. But when making that decision, it’s important to consider all aspects of how the transition will affect your business, to ensure you get the timing absolutely right. These include the following.

Salaries and dividends

As a sole trader, you’re liable for PAYE tax and national insurance on all of your income. As a limited company, you’ll only pay corporation tax (which is a lower rate than PAYE plus national insurance in almost all circumstances) on the profits made by the company. As well as setting a salary for yourself, you can also choose to pay out dividends, topping up your take-home pay in a more tax-efficient manner. Meanwhile, executive pensions for yourself and your employees can be legitimately counted as a business expense, managing your taxation more effectively again.

Upscaling potential

Becoming a limited company is not necessarily an intrinsic stage of the upscaling process, but it is true that it can help in certain respects. For example, hiring staff is far simpler as a limited company than a sole trader, since it merely involves adding them to the PAYE scheme. Even accepting investment from external sources becomes vastly simplified in the form of selling company shares. As such, becoming a limited company is not essential to upscaling, but it can certainly assist matters.

Attracting bigger clients

By adopting the moniker of a limited company and assuming its alias for all your various products and services, you make yourself more attractive to a wider range of prospective clientele. Indeed, in some industries – particularly in highly legislated ones such as finance, healthcare and pharmaceuticals – some companies see a limited company as a prerequisite before opening any business negotiations with a new partner.

Limited liability

As the title suggests, a limited company incurs less liability than a sole trader may be exposed to. What does this mean in simple terms? Well, if your business suffers from a downturn in fortunes and goes bankrupt, your own personal assets (such as house, car and savings) could be lost to creditors. Conversely, a limited company offers financial security, as your own assets and the business’s remain distinct entities. For anyone operating in risky markets or with large amounts of money, this could be a hugely attractive advantage.

Naming rights

Another benefit which arrives when you start a limited company is the legal protection afforded to your company’s name. As soon as it becomes registered with Companies House, the name is protected by UK law, meaning no rival businesses can take the same name. As a sole trader, those kinds of safeguards are not in place, which might be fine if you only operate on a local scale. However, companies looking to expand nationally or even internationally would be well-advised to look after their intellectual property by securing naming rights.

Weighing pros with cons

As you can see, there are a myriad of potential benefits involved in transitioning from sole trader to director of a public limited company, and in most cases it does make prudent financial sense to do so. However, it’s not all plain sailing and there are a number of drawbacks involved in limited companies. These include:

Increased admin

As the director of a business listed with Companies House, you’ll now be beholden to a set of regulations known as Fiduciary Responsibilities, which require to comply with a number of time-consuming administration tasks. Chief among these is the filing of your tax returns with HMRC and Companies House each year. While this must also be undertaken as a sole trader, the effort involved can be significantly greater and more complicated.

Public accountability

Once registered with Companies House, certain private information about your business will become available to any member of the public who wishes to see it. This includes a business address for the company, as well as the names, nationalities, job descriptions, dates of birth and home addresses of all directors. There is no such requirement for sole traders.


The government has introduced legislation which ostensibly has the aim of preventing individuals manipulating the system by working as an employee in all but name and reaping the tax benefits of setting up a limited company. However, the dragnet cast by this rule has caught plenty of legitimate self-employed people as well, meaning setting up a limited company may no longer hold the same attraction as it formerly did.

Considering your options

While these drawbacks are generally outweighed by the financial benefits associated with starting a limited company, there are those who view the stress, inconvenience and legwork of setting up the venture not worth the effort – especially when IR35 is taken into consideration. For individuals such as these, there is another option: an umbrella company.

An umbrella company works by taking responsibility for all of the boring administration and financial aspects of your business, filing tax returns, claiming expenses and invoicing clients, among others. They also offer statutory benefits which are not available to those working either as a sole trader or director of a limited company, including sick pay, holiday pay and maternity or paternity leave. In exchange, they demand a monthly or weekly fee for their services.

Of course, whether or not this third option is most attractive to you will depend entirely upon your own circumstances and personal preferences. It is always good, however, to consider every possible avenue available to you before making a decision that will inevitably have significant consequences for the future of your business.

Get umbrella quotes in minutes

If you want to take a closer look at the umbrella avenue, Umbrella Supermarket is always on hand to help. By entering a few details on our umbrella comparison site, you can get several quotes from reputable umbrella companies to find the best deal for you.

Would you like more information on When Should You Start a Limited Company??

Explore More Resources

using an umbrella company

Beginner’s Guide to Using an Umbrella Company

If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.

After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.


PAYE and Umbrella

Guide to PAYE vs. Umbrella

PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.

To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.

Holiday Pay for Umbrella Contractors

Complete Guide to Holiday Pay for Umbrella Contractors

One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.

To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.

umbrella company

When Shouldn’t You Use an Umbrella Company?

Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.

One way that contractors can work is through an umbrella company.

Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?

To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.


The truth about HMRC approved Umbrella Companies

There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.

After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.

However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.

To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.

umbrella company costs

How Much are Umbrella Company Costs?

If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.

To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.


Choose Between PAYE or Umbrella

How to Choose Between PAYE or Umbrella

Every contractor faces the decision between PAYE or umbrella, but how do you know which is the best option for you?

After all, PAYE and umbrella both have key differences, meaning contractors should do their research to find the best path for them.

Thankfully, Umbrella Supermarket is here to help. In this guide, we take a look at PAYE vs. umbrella, explaining what you should know before making the all-important decision.

date rates vs hourly rates

Should contractors choose hourly or daily rates?

There are many decisions a contractor must make in their career. One important one is whether to charge daily rates or hourly rates.

Each option has its own pros and cons and will have a different impact on contractors.

Therefore, it’s important that every contractor does their research to find out which option is best for them.

In this guide, Umbrella Supermarket looks at hourly rate vs daily rate and the benefits and drawbacks of each, to help every contractor find the best route forward for them.


public sector private sector contractors

How to choose between public sector vs. private sector for contractors

Every contractor must make the decision about whether to work in the public sector vs private sector.

Operating in the public or private sector can have a big impact on the contractor’s career, including on what types of contracts they will work on, who they will work with to whether they will fall under IR35.

This is especially true since changes to IR35 legislation were rolled out in April this year which have had a significant impact on private sector contractors.

If you are debating between contracting in the public sector vs private sector, Umbrella Supermarket are here to help. In this guide, we outline the key differences between the public and private sectors and what effects this will have on contractors.

contractor options

Complete Guide to Contractor Options

Contracting has become an increasingly popular way of working in recent years. If you have decided that the time is right to begin your contracting career, one of the first questions you will ask yourself is how you will operate.

How they operate is one of the main decisions contractors must take which will have a big impact on your day-to-day contracting life.

After all, there are a number of ways you can work, including through an umbrella company or by being self-employed.

In this guide we look at umbrella company contracting vs self-employed contracting and the main advantages and disadvantages of each, to help you make the right decision.


Statutory payments

Statutory payments for contractors explained

Contractors can choose to work on a self-employed basis through their own limited company, or through an umbrella company as an employee of the provider.

Thousands of contractors choose the umbrella route. After all, there is a range of benefits to operating under an umbrella company, including receiving statutory rights.

If you are considering becoming an umbrella contractor in 2021 and want to know more about statutory payments for umbrella contractors, Umbrella Supermarket has put together this handy guide outlining everything there is to know.

comparing umbrella companies

What To Look Out For When Comparing Umbrella Companies

Working through an umbrella company has become an increasingly popular option for contractors in the UK.

An umbrella company makes contracting easy and hassle-free for contractors, saving them headaches on everything from tax, payroll, insurance to dreaded IR35.

However, with are so many umbrella companies out there, choosing the perfect one for you is no easy task.

To help, Umbrella Supermarket have put together this handy on what to consider when comparing umbrella companies, so you can find the best one in 2021.