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.

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