When you’re first starting your own business, setting up as a limited company might seem the obvious road to go down, however, doing so might be more trouble than it’s worth. For those operating as a sole trader- which means that your business is basically just you – then there are other alternatives to setting up a limited company which could be worth considering first.

The advantages of a limited company

Setting up as a limited company makes you a director of your own business, giving you complete control over your financial and business affairs while also keeping them separate from your personal finances and reputation. This means you take full responsibility for your accounts, paying taxes and complying with legislation, but the company remains a separate legal entity from you as an individual, which could prove important if things go seriously wrong.

Setting up as a limited company is generally only worthwhile if you’re likely to have a substantial annual turnover and intend to have several employees. Generally, it is the most tax-efficient way of working, but you will either need to dedicate a lot of time and energy to paperwork or employ a full-time accountant.

Watch out for IR35

Individuals setting themselves up as a limited company can also risk falling foul of IR35 legislation if they are contracted out to a client on a long-term basis. IR35 covers off-payroll working through an intermediary and is designed to close loopholes where someone is to all intents and purposes an employee of a company, but pays tax and national insurance differently because they are working on behalf of their own limited company or a personal service company.


If you are a sole trader or in a partnership then you can simply register as self-employed with HMRC, declare your earnings at the end of each tax year and pay the tax and NI that you owe. It sounds straightforward, but the more you earn the more complex it can become. Many people dread doing their tax return, and for good reason. It’s recommended to pay an accountant to do this for you to avoid being caught out.

Using an umbrella company

The third alternative if you’re working for yourself is to do so through an umbrella company. This essentially means working under an umbrella PAYE arrangement that takes care of tax and paperwork for you in return for a small fee. At the end of each job of work you submit your timesheets and expenses claim to them and they pay you your money and supply a payslip for your records.

For short-term work and when starting out, this is by far the easiest route to go down and means that you won’t be fined for non-compliance or IR35 issues, or find yourself facing a large unpaid tax bill further down the line.

There are good reasons why you might eventually want to set up as a limited company. But initially you’ll find it far easier to register as a sole trader or work through an umbrella company. These arrangements may change with time, but initially you need to look at what’s best for you.