Setting Up Your Business: The Basics
As a consultant, you’re running a business whether you think of yourself that way or not. That means choosing a legal structure — and doing it properly, because getting it wrong has real financial and legal consequences.
I’m not an accountant, and this isn’t professional advice. What I can do is share my experience and point you in the right direction. The one thing I’ll say unequivocally: take professional advice before you decide. It’s worth it.
Note: the following applies to the UK only.
Sole Trader
The simplest option with the least red tape. A sole trader is self-employed and owns their business outright. There’s no need to register with Companies House, no director requirements, and the process to get started involves little more than registering with HMRC for self-assessment.
The downside is personal liability. If the business makes losses or incurs debts, you’re personally on the hook. For some types of consultancy work that’s a manageable risk; for others, it’s not.
Limited Company
Most consultants operating at a meaningful scale will set up a limited company. You become the director — and possibly the sole shareholder — of your own company. It sounds impressive. In practice, it comes with real responsibilities.
The main advantages:
- More credibility with clients and agencies — many will only work with limited companies
- Dividends are taxed at a lower rate than personal income, and aren’t subject to National Insurance
- Greater tax efficiency overall, if structured correctly
- Limited liability — the company is a separate legal entity, and your personal assets are generally protected from business debts
The significant downsides:
- More complex accounting, and more deadlines to meet
- IR35 — more on this below, but understand it before you incorporate
- Statutory filings are compulsory: company accounts, tax returns, confirmation statements. Miss them and you face penalties, and potentially worse
- You’ll almost certainly need an accountant — factor that cost in from the start
- Public liability and professional indemnity insurance is highly advisable, and often required by clients
- Your accounts are public record. Competitors can look you up
- You can’t just move money out of the company informally — every payment to yourself must be recorded as salary, dividend, or a loan
- If you work internationally, a UK limited company can create complications — there are restrictions on operating in some jurisdictions
Umbrella Companies
An umbrella company employs you directly and contracts your services to the end client or agency. You get paid as a PAYE employee, with tax and National Insurance deducted at source. The umbrella handles invoicing, payroll, and most of the paperwork.
This is the simplest option in terms of administration. If you’re just starting out and aren’t sure contracting is for you, it’s a low-risk way to try it. You can always move to a limited company structure later if things are going well.
The trade-off is that you lose the tax advantages of running your own company. All income comes as salary, and the umbrella deducts its fee on top. You also have less control — you’re relying on someone else to invoice correctly and pay you on time.
If you go the umbrella route, research carefully. Be very sceptical of companies promising unusually high retention rates. If the numbers look too good to be true, they are. HMRC has caught up with most of the schemes that used to circulate.
A Word About Accountants
Whether you’re a sole trader or a limited company, you’ll probably need an accountant at some point. A few things worth knowing.
First: try to find one you can meet in person. There’s no substitute for sitting across the table from someone when something goes wrong.
Second, and this is important: in the UK, if your accountant makes a mistake in your tax return, YOU are still liable for the tax owed. Not them. You.
As company director, it is your legal responsibility to ensure your company’s compliance — even if you\ve paid someone else to handle it. If the accountant is at fault you can pursue them separately, but that doesn\t relieve you of the obligation to HMRC. I know this from personal experience. It’s not a pleasant lesson to learn.
In short: find an accountant you trust, stay engaged with what they’re doing, and make sure you understand what’s being filed in your name.