Yeah, software can only work on files already recorded. You are correct that you don't want to clip while tracking, so you need to set your levels low enough to prevent that. Then later you'll use compression plugins to get the levels up where they need to be.
To me, this is definitely one advantage to hardware compression in that you lower the noise floor of the original track. See Brandon's article and also the replies to it :
Don't Buy A Hardware Compressor...Unless | Home Recording Blog