Setting up a limited company is what many of those who are new to contracting choose to do, providing their circumstances match the criteria needed in order to work in this way.
The question is, why?
If you are a new contractor, one of the most important decisions you will make is whether to establish a limited company of your own or to utilise the services of an umbrella company.
Here, we look at what limited companies are, how you go about setting one up and what the advantages and disadvantages are.
What is a limited company?
A limited company is one where the liability of the shareholders and directors is limited to what they have invested in the company.
In short, it has its own assets and liabilities, meaning that should the business fold, the assets of the shareholders and directors will not be required to satisfy any outstanding debts.
Why do so many contractors set up limited companies?
The main reason why so many contractors choose to establish their own limited companies has to do with the various tax benefits that are available.
Clients will pay you via your limited company and instead of taking money from your company in the form of a salary, you can declare it as a dividend, which reduces the combined tax you and the company are required to pay.
Limited liability is also an attractive benefit of setting up a limited company. As the company is a separate corporate body, the liability for payment of debts remains with the company, so your personal assets are not under threat.
What are the downsides?
The major disadvantage of choosing to set up a limited company rather than work under an umbrella company has to do with the amount of paperwork you will be required to complete.
You need to file your accounts each year, chase payments, work out your tax returns and other administrative tasks, which can take away from the time you have looking for new contracts.
In addition, you must ensure you are compliant with IR35 legislation. IR35 compliance is of the utmost importance, as you can be fined and ordered to pay back any taxes owed if HM Revenue and Customs decides you should have been operating within the legislation.
An accountancy services provider can relieve the administrative burden on you, advise you on IR35, although you will have to pay for their services.
How do I set up a limited company?
Provided you are not restrained under a court order, an undischarged bankrupt or the subject of UK government restrictions, you can set up a limited company.
To do this, you will need to decide on a name for your firm, have at least one director and shareholder and complete the Memorandum of Association, Articles of Association and form IN01.
Following this, you must submit the documents to Companies House.
Is setting up a limited company difficult?
The process in itself is not especially difficult, however, you could benefit from engaging the services of an accountancy services provider to handle the process for you to ensure you meet all the requirements and can start contracting as soon as possible.
Where can I find more information about setting up a limited company?
Various accountancy service providers exist that can help you establish your own company and help you with the administrative burden involved with the day-to-day running of the organisation.
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