Sole trader or limited company:
setting up a fractional practice

This is the question I am asked more than any other, usually within a fortnight of somebody deciding to go independent, and usually phrased as though there is a single right answer waiting to be looked up.

Why there are no tax rates on this page

Deliberately, and it is worth explaining before anything else.

Every tax figure I could put here would be wrong within a year. Thresholds move, dividend rates move, allowances move, and an article that quotes them confidently becomes a trap for whoever reads it eighteen months later. There are a great many pages about company structure that are quietly out of date and none of them say so.

So this page publishes the parts that do not decay: the liability position, the mechanisms that make one structure more efficient than the other, the administrative reality, and what to expect from the person you pay to know the numbers. For the numbers themselves, go to gov.uk and to your accountant.

And this is not tax, legal or accounting advice. I am a consultant who has run limited companies for a long time and made an expensive mistake inside one, not an accountant.

The argument that actually decides it

People arrive at this question thinking about tax. The thing that should decide it is liability, and it is the part that gets least attention because it describes something that has not happened yet.

As a sole trader you carry the full liability for your business, personally. The business and you are the same legal thing. If you get it wrong, it is you who gets hit.

Make it concrete. You are working inside an organisation, you make a mistake, and their database is wrecked, or their code is destroyed, or their systems are down for two days. Real money, real consequence, and their lawyers looking for somebody to recover it from.

The whole concept of a limited company is that you are not the company. The company is its own legal entity, and limited in the phrase refers to the liability. In that scenario they do not chase you. They chase the company. The company is liable, and the worst case is that the company becomes insolvent - which is a bad day, but the company has it and you do not. Nobody comes for your house or your personal possessions.

That is not an abstraction to a fractional. You are operating inside other people's businesses, with access to their systems, their data and their decisions, and you are doing it at a level of seniority where the things you touch matter. The exposure is real and it is not the sort of thing that is easy to insure your way out of entirely.

The credibility half

The second argument is commercial, and for a fractional it is close to as important as the first.

If you are walking into organisations presenting yourself as a credible operator, the limited company is what matches the story you are telling. It signals that this is a business rather than a person between jobs - and the person deciding whether to engage you is making exactly that judgement, whether or not they say so.

There is a practical version of this too. A good number of larger organisations will not engage a sole trader at all, because their procurement or compliance process is not built for it, and some cannot engage an individual without triggering employment status questions they would rather avoid. That is not a preference you can argue with - it is a policy, and it is applied by somebody who has never met you.

Why the tax comparison compresses

Here is the mechanism, without any figures, because the mechanism is the part that stays true.

As a sole trader, everything the business earns is treated as your personal income and taxed accordingly. There is no distinction between money in the business and money in your pocket, because there is no business separate from you. As profits rise you move up the personal tax bands, and in the UK that gets uncomfortable reasonably quickly.

A limited company is taxed differently, and the usual efficiency comes from taking a modest salary and the rest as dividends, because dividends are taxed at lower rates than salary at the equivalent level.

So far, so familiar. Here is the part that gets left out of most explanations.

A company pays corporation tax on profit, not on turnover - and salary you pay yourself comes out of profit before corporation tax is calculated. So if you pay yourself a salary, there is less profit and less corporation tax. If you take dividends instead, you have more profit to pay corporation tax on, and then the dividend is taxed on top.

That is why the comparison compresses. The saving on one side is partly given back on the other, and the honest answer is that the advantage is real, it is smaller than the internet implies, and its size depends entirely on how much profit you are making and on rates that change every year.

Two practical points that do survive the rate changes.

The decision is different at different levels of profit. At low profit the structures are much closer together. As profit rises the gap widens. Which means a decision that was right in your first year may not be right in your second.

So re-run it at the end of year one. This is the thing I most often have to tell people. Accountants make a judgement at a point in time and then move on to the next client. If at the end of your first year you have three clients and regular invoicing, you can forecast year two reasonably well - so take that forecast back to your accountant and ask whether their advice still holds. Year one advice going stale in year two is the single most common structural mistake I see, and it is not the accountant's fault. Nobody asked them.

What you take on

The trade for all of the above is administrative, and it is genuine rather than trivial.

	Sole trader	Limited company
Liability	Personal, unlimited	Sits with the company
Set-up	Easy	An afternoon, with a small fee
Income	All of it is personal income	Salary, dividends, or both
Public record	Little about you is published	Company, officers and accounts are public
Filing	Self assessment	Annual accounts and a confirmation statement, every year, without exception
Larger clients	Some will not engage you	Expected

The filing obligations are not optional and they do not pause. A limited company must deliver annual accounts and file a confirmation statement every year whether it traded, broke even, or did nothing at all, and there are penalties for missing them. If you incorporate and then have a quiet year, the filing still happens.

My own position, and it has two halves. I do not see any reason not to start as a sole trader while you are proving the business and do not want the overhead of setting a company up. But if you do that, you need a plan to transition, with a trigger on it - a revenue level, a client type, a date. Otherwise the temporary arrangement becomes the permanent one by default, and it becomes permanent at exactly the point when you have most to lose.

Given a straight choice with no other information, my view is limited company.

What about an umbrella company?

This comes up because it is the third option people find when they search, and for most fractionals it is the wrong question rather than the wrong answer.

An umbrella company employs you and runs you through its payroll for an engagement. It exists to solve a contractor's problem: a single assignment, usually day rate, where the client or the agency will not engage a limited company - often for employment status reasons. You become an employee of the umbrella, they invoice the client, they pay you through PAYE, and they take a margin.

For that situation it is a reasonable mechanism. For a fractional practice it is the wrong shape, for three reasons.

You cannot run a practice through it. A fractional bills several clients, for outcomes rather than days, under their own contracts. An umbrella is built around a single assignment routed through somebody else's paperwork.

You cannot price properly through it. Value-based fixed-price work does not fit an arrangement designed to convert timesheets into payroll.

It positions you as contract labour, which is precisely the perception a fractional practice spends its energy escaping. Day-rate contracting is the closest thing to what most people leave employment to get away from, and umbrella is its administrative form.

If you are taking one day-rate assignment to pay the bills while you build, that is a pragmatic decision and not a moral failure. But it is a job you took, not the structure of your business.

VAT, and why to register before you have to

Above the registration threshold there is no decision to make. Once your taxable turnover passes ninety thousand pounds, registration is compulsory, and it applies whether you are a sole trader or a limited company. The current position is on gov.uk and it is worth checking rather than trusting me, because it has moved before.

Below the threshold you can register voluntarily, and I usually would.

You reclaim the VAT on what you buy for the business. It is not the case that you charge twenty thousand and hand over twenty thousand - what you pay across is the difference between the VAT you charged and the VAT you were charged on legitimate business costs.

And to a business client it is not a cost. They reclaim it. What registration signals to them is that you are running a real business at a real scale, which is the same credibility argument as the company structure itself.

The old objection to registering early was the administrative burden, and modern accounting software has largely removed it. It is not something I think about any more.

What to expect from an accountant

Get one. And be clear about what the job is, because vagueness here is where people get hurt.

An accountant has two jobs. Keep you legally straight on every submission that has to happen - accounts, confirmation statement, payroll, VAT, corporation tax. And advise you on the most efficient way to get money out of the business. That is the whole brief. I do not need anything else from mine.

Timeliness is part of the job, not a bonus. A good accountant tells you what you should be doing at the point you can still act on it. One who leaves you a day to react, or so little time that you are exposed, is not doing the work - and that is a reason to move rather than a quirk to tolerate.

Solopreneur packages covering bookkeeping, company set-up, confirmation statements, year-end accounts, payroll and VAT returns are widely available and inexpensive. All you have to do is record your invoices and your receipts.

One warning from experience. The small independent firms are often the best of them, and they are also being bought up by larger consolidators. I have twice chosen an excellent one-person practice and had it acquired out from under me, ending up somewhere I would never have chosen. It is worth asking who owns them, and it is worth noticing when the service changes rather than assuming you are imagining it.

The mistake that cost me a company

This is the part of the subject nobody writes about, so here it is.

A director's loan account is, in simple terms, what records money you have taken out of the company that is not salary and not a dividend. It has legitimate uses. It is also the mechanism by which a company can quietly get further and further out of position without anything looking wrong on any given day.

I had an accountant who used it to get more money out of the business than we should have been taking out. Not fraud - just advice, taken by somebody who did not fully understand the downside, which was me. Over three years it built into a mountain I could not outrun.

The conversation at the end of it was short. I was told the answer was simple: put the money back. And who has fifty thousand pounds in their back pocket to repay into a director's loan account they did not really understand existed in the first place? The company went into liquidation and the debt was written off with it.

I speak to a great many people now who have some version of this, and the shape is always the same: an accountant advising something the client does not fully understand, without anybody examining the downside eighteen months out.

So the test is simple, and it is yours rather than theirs. If you cannot explain in your own words why a piece of financial advice is safe, do not act on it yet. A good accountant gives you balanced advice so that you do not walk into that position. Not all of them do, and the consequences are yours either way.

Your company name matters less than you think

People spend a surprising amount of time on this. I once spent seventeen hours trying to think of a clever company name, arrived at a set of initials, and ran that business for six years without a single person ever asking what they stood for.

You can trade under a different name from your registered company name. For four or five years, No-Nonsense Leadership was a trading style of a completely differently named limited company. Every invoice said No-Nonsense Leadership. Every email said No-Nonsense Leadership. The only requirement was a footnote at the bottom of anything legally commercial, in very small type, saying that No-Nonsense Leadership is a trading name of the registered company, with its number.

So if you are incorporating, the registered name is close to irrelevant and you should not let it hold you up for a week. The one restriction that matters is that you cannot trade as a name somebody else has trademarked, which rules out the obvious jokes and nothing else.

The name that does matter is how you describe yourself when you shake somebody's hand, and that is a positioning question rather than a company formation one.

Frequently Asked Questions

Where to go from here

If you take one thing: decide this on liability, not on tax. The tax difference is real and modest and changes every year. The liability difference is absolute and does not change at all.

If you take a second: put a date in the diary for the end of your first year to take a forecast back to your accountant. The structure that was right when you had no revenue is not automatically right when you have three clients.

The structure is the container. What goes in it is the contract, the payment terms and the cover, and none of those depend on which structure you chose.