Sole Trader or Limited Company? A Building Contractor's Guide

It's one of the first big questions every contractor faces, and one worth revisiting as you grow. Should you trade as a sole trader or set up a limited company? A lot of people assume it's purely about tax. It isn't. It's about liability, credibility, admin and how you take money out of the business too.

There's no single right answer, the best structure depends on your numbers and your plans. But here's what to weigh up so you can make the call with your eyes open.

The two options in a nutshell

The factors that actually decide it

1. Your profit levelThis is the big one for tax. At lower profits the two are often similar, but as profits grow a limited company usually becomes more tax-efficient, because you can take a mix of salary and dividends rather than being taxed on everything as income. Where the line sits depends on your numbers, which is exactly why it's worth modelling rather than guessing.
2. Risk and liabilityConstruction carries real risk, a job that goes wrong, a client dispute, a debt. As a sole trader, your business and your personal finances are legally the same thing. A limited company puts a legal wall between the two, which can matter a great deal as jobs get bigger.
3. Who you work forSome main contractors, developers and larger clients simply prefer, or require, to deal with limited companies. If you're chasing bigger work, incorporating can open doors.
4. How you want to take money outA sole trader just draws the profit. A company is separate from you, so you pay yourself through a planned mix of salary and dividends, more efficient, but it needs doing properly.
5. Admin and costA company means annual accounts, a Corporation Tax return, a confirmation statement, usually payroll, and more record-keeping. It's very manageable with the right accountant, but it's more than a sole trader carries.
6. CIS still applies either wayWhether you're a sole trader or a company, CIS works the same in principle, but the mechanics of reclaiming deductions and holding gross payment status differ by structure. Here's how CIS works →

You're not locked in

Plenty of contractors start as sole traders and incorporate later, once profits and risk have grown to the point where a company makes sense. That's a perfectly normal path, but the timing has tax consequences, so it's worth getting advice on when to make the move, not just whether to.

This article is general guidance for building contractors, not advice for your specific situation. The right structure, and the tax involved, depends on your circumstances; always take advice before deciding.