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How to Run a Contracting Business Via a Limited Company.
Is Contractor LTD Company Right For You?
The first decision for anyone who moves into contracting is how they are going to organise their business and their finances. For a long time, most contractors used their own personal limited companies to manage their businesses but in recent years there have been a number of contractors also using umbrella companies, thanks in part to the introduction of the hated IR35 legislation by HMRC. However, despite the best efforts of HMRC, limited companies are still the default setting for contractors as they best represent the ideal of striking out on your own, being your own boss and choosing the kind of work that you want to do. They are also still just about the best option for those contractors who earn in excess of £200 per day as they are seen as the route to slightly less tax and national insurance (though again, IR35 considerations come into play here.) So if you are currently thinking about how best to organise your contracting business and are leaning towards a limited company (for more information on umbrella companies click here), this page will hopefully help you make a more informed decision:
What Exactly Is A Limited Company Then?
The first thing to realise about a limited company is that it is its own legal entity. It is an organisation that is seen as a ‘legal’ and ‘moral’ person in the eyes of the law and therefore has its own name and identity. Like any other person, it can make money or lose money, has a bank account, can run up debts and has to pay its own taxes. The owners of the company are protected by what is known as ‘limited liability’ and what that means is that they will only be held responsible for any business debts that are up to the value of their investments or their guarantee to the company.
Setting Up Your Limited Company
Limited companies have to be registered with Companies House (the UK companies registrar) and must be either ‘limited by guarantee’ or ‘limited by shares.’ Companies that are limited by guarantee are companies that are owned by one or more of their guarantors and that will be managed by one or more directors. Companies that are limited by shares are companies that are owned by one or more of their shareholders and will be managed by one or more of their directors. Additionally, the same person is allowed to be both the director and the owner, meaning you can set up a company on your own or with other people.
Ok, So What Are The Benefits of Starting A Limited Company Then?
The main reason most contractors opt for a limited company with themselves as director and shareholder is that it is still seen as being the best option when it comes to tax efficient contracting. The following are considered to be the main benefits of limited companies:
- You have full control over your own destiny. You are your own boss and have full control over all company dealings and transactions.
- You can be seen as representing your company and running your own business with its / your own trading name.
- You have full control over your company revenue. It is paid directly into your limited company bank account as opposed to having to pass through an agency or umbrella company account.
- Consequently, you will have faster administration and payment processes for all your transactions.
- Your tax burden will be less (and your net pay higher) as you are able to take your pay via dividends which are not subject to the usual rates of national insurance (provided IR35 does not apply.)
- You are able to claim from a far greater range of tax-free business expenses, including travel and subsistence, software and hardware, accountancy and legal (again, with the same caveats regarding IR35.)
- You are able to use HMRC’s VAT flat rate scheme, through which your limited company can charge Vat at 20% but will only have to pay back HMRC at rates as low as 14.5%, (depending on what type of contracting you do.)
Sounds Great, What About The Disadvantages?
A lot of contractors these days are choosing not to go with limited companies and are instead opting for umbrella companies. That’s because there are also some disadvantages to limited companies, which include:
- For contractors who are starting out and not sure that they are going to be contracting for a long time, umbrella companies are ideal as you can be up and running the same day with no commitment. Limited companies take more effort to set up and a lot more effort to dissolve. Limited companies don’t allow you to test the water of contracting!
- The main problem with limited companies is the sheer amount of paperwork and admin that goes into maintaining the limited company itself, from things like the filing of tax returns and dealing with HMRC.
- Additionally, there is a lot of admin involved in day to day work such as invoicing of clients, keeping the limited company accounts ticking over, filling out forms and dealing with an accountant when necessary.
- Lastly, the most recent, and most problematic issue for limited company contractors is IR35. Most working limited company contractors will tell you that IR35 is the biggest stress in their contracting life. Ever since its introduction in 2000, HMRC has made IR35 stricter and stricter in the pursuit of disguised employment. For limited company contractors, IR35 now means every contract has to be checked and then rechecked for its potential to be caught under IR35 and the resulting additional tax, national insurance and penalties.
Making The Decision To Go Limited – Factors To Consider.
In the end, the decision whether to work via an agency, an umbrella company or a limited company will depend on each individual contractor and the type of contracting that they do. With that in mind, here are the most important factors you should consider when making your decision:
- Planned Length of Contracting– if you are just setting out on your contracting career, are you certain it is for you? Will you be in it for the long haul? If you intend to do it for a long time then a limited company may be the better option. If you want to ‘try before you buy’ then you may wish to work through an umbrella company or agency at first.
- How Much Control Do You Want?– If you like handling everything yourself and prefer to micromanage every part of your contracting then you should opt for a limited company.
- Do You Hate Paperwork?– On the other hand, if you really have no appetite for paperwork and are not keen on taking on a lot of admin (dealing with forms, invoices, spreadsheets and accountants, HMRC and VAT returns) then you might prefer the simplicity of an umbrella company.
- Do You Value Presentation / Status– Many contractors believe that being a director of a limited company has a certain status with third parties and looks more impressive. If you agree, then you should set up your own limited company.
- Are Your Contracts Outside of IR35?– If you have checked your contracts and know you will not be caught out by IR35 then limited company contracting is a viable option for you.
- Will You Be Earning More Than £200 Per Day?– The higher your daily contracting rate, the more useful the tax perks of limited company contracting will be to you.