Deciding on what type of business to set up as is a huge decision that will shape the way you work and grow. For some businesses, it’s a simple choice of either sole trader or limited company. For others, particularly people who work solo, the choice can be more complicated than you might think.  

Sole trader might seem like the default option for a contractor working solo but there are benefits from starting a limited company instead. According to ContractorCalculator, contractors setting up as sole traders are actually becoming a rarity.

They have found that contractors are much more likely to set up a limited company or to join a contractor umbrella company.

Businesses hesitant

One of the main barriers to contractors operating as sole traders is that some of their clients and agencies will refuse to work with a sole trader.

This is often because clients are wary that working with a solo contractor might look as if they’ve hired them as an employee. This would mean that they are therefore be liable to provide them with employee benefits.

IR35 changes have made this hesitation more pronounced.  More contractors are coming out and demanding employee rights through Employment Tribunals, particularly in construction and courier jobs.

As a result of this, some clients will only take on a new contractor is they’re willing to incorporate and form a limited company.

Limited companies offer more protection

From a contractor’s point of view, it may be more beneficial for them to operate as a limited company.

Contractors might be hesitant to operate as sole traders because the liability falls on them and their personal assets. A limited company gives you a bit more protection if things go wrong because it’s a separate legal entity from the contractor themselves.

Umbrella companies

Some contractors will join an umbrella company instead. This is a common medium between being a sole trader and starting a limited company.

Umbrella companies act as an employer and an intermediary between a contractor and their client. They will manage payments to their contractors and the contract between them and the client.

Some are hesitant to set up this way as it looks like you’re just an employee but there’s still more flexibility over working hours than there is being a traditional employee.

Have you found that people are less likely to work with sole traders? Which route did you go down and why? Please let us know your thoughts.

If you need more information regarding contractors please see our guide here.

Want to learn more?

Subscribe to our newsletter to get accounting tips like this right to your inbox

About The Author

Kara Copple

An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.

More posts by this author