Structuring success
When working outside IR35, it’s a good idea to set up a limited company as an efficient way to manage your contracting income. We’ll outline what it takes to establish yours, why you should, and point out some helpful resources along the way.
What is a limited company?
A limited company is a business entity recognised by UK law. It’s independent from its owners (shareholders) and managers (directors). This separation provides a degree of financial and legal protection that isn’t available to other business structures, like sole traders or partnerships. Here are the key securities and protection it offers:
Limited liability and asset protection: Your financial liability is restricted to the amount invested in the business, protecting your personal assets from business debts or liabilities. This means that your shareholders’ personal assets are protected against any business-related financial difficulties.
Corporate veil: This means there’s a distinct separation between the company as an entity and the individuals who own and run it. So, there’s a layer of anonymity and protection to the directors and shareholders.
Tax benefits: Limited companies can enjoy certain tax reliefs and benefits that individuals or sole traders can’t, which potentially reduces the overall tax liability.
Legal protection: Operating as a limited company can offer protection against being personally sued for your company’s actions, and safeguard your assets during business insolvency, assuming there’s no misconduct involved.
Understanding these protective measures can help you build a legally compliant, secure business.
The advantages of a limited company
Setting up a limited company has a range of great benefits for contractors. These include:
Enhanced tax efficiency
Limited companies typically provide more opportunities for tax planning than sole traders or umbrella companies. Some of the top tax advantages include:
Corporation Tax relief: Lower rates than Income Tax for sole traders.
Dividend payments: Taxed at a lower rate compared to Income Tax on salaries.
Flat rate VAT scheme: Simplifies VAT accounting and often saves money.
Research & Development (R&D) tax credits: Reduces your Corporation Tax bill if you're involved in R&D.
Annual Investment Allowance (AIA): Deducts the full value of most plant and machinery from your profits before tax.
Salary sacrifice schemes: Offer benefits like pension contributions, childcare vouchers, or cycle-to-work schemes that are tax-efficient.
Capital allowances: Claim tax relief on capital expenditure like equipment, vehicles, or machinery.
Personal pension contributions: Make pre-tax contributions to personal pension schemes.
Business expenses: Claim a wide range of business expenses to reduce your overall tax liability.
Entrepreneurs' relief: Pay less Capital Gains Tax when you sell or give away your business.
Here’s a more detailed list of the tax benefits your limited company could get:
Professional image
Having a limited company shows that you’re committed to your craft, which can present a more professional image to potential clients. Here’s how:
Sign of commitment: Show potential clients that you’re serious about your business and are here to stay.
Trust and credibility: Build trust by portraying a structured and reliable business entity.
Competitive edge: With a limited company, you’ve got an edge over competitors operating without a formal business structure.
Brand-building: Use your company to build a reputable brand, demonstrating quality and professionalism.
Owning a limited company isn't just about reaping the legal and financial benefits; it's also an opportunity to create a strong brand and a respected name in the industry. Make the most of this by maintaining a professional image, attracting quality clients, and fostering lasting business relationships.
Limited liability for contractors outside IR35
As a contractor working outside IR35, you should understand and leverage the advantages of limited liability to protect and enhance your business. Let’s take a look at what limited liability involves, and how it can benefit you:
Controlled financial risk: Limits your financial risk to your business investments, protecting you from extensive business debts.
Better negotiation power: Boosts your negotiation position with creditors, which is helpful during financial setbacks.
Business continuity: The benefits of legal liability helps with business continuity, even when facing unexpected events.
To make the most of your limited liability status, you can consult experts who specialise in business consultancy, legal advisory, or financial planning.
How to set up a limited company
To start your own limited company, you need to go through a step called incorporation. It's pretty straightforward, and you can do it online through Companies House. Here’s a quick overview of how to get started:
Choose a name: Make sure it’s unique and not used by another company.
Register the company: Give it a go on Companies House with this step-by-step guide. Or you can use these company formation services to handle everything for you:
Prepare documents: To set up a limited company in the UK, you’ll generally need these documents:
Memorandum of Association: This document contains the names and signatures of the people forming the company. It's essentially a statement made by all the shareholders or guarantors that they agree to form the company.
Articles of Association: This outlines the rules about running the company, agreed by the shareholders, directors, and the company secretary. It covers certain elements like how decisions are made, and the rights attached to shares.
Incorporation Document (Certificate of Incorporation): This certificate is issued by Companies House as proof of the company’s formation, containing details like the company's name, registration number, and date of incorporation.
Statement of Capital: This document lays out the capital of the company, detailing the shares held by each shareholder and their individual rights.
Statement of Initial Significant Control (PSC): This statement identifies individuals or legal entities that have significant control over the company, holding more than 25% of the shares or voting rights.
Register of Directors: This is a detailed record of the company's directors, including their personal details and the roles they play in the company.
Register of Shareholders (or Members): This register keeps a record of the individuals or entities that hold the shares in the company.
Register of People with Significant Control: This is a regularly updated document, listing the people with significant control over the company. It’s maintained alongside the Statement of Initial Significant Control.
Register of Secretaries: A secretary isn’t mandatory for limited companies, but if you choose to hire one, you’ll need to outline their details and role on this register.
Find out how to create these required documents on Gov.uk, or use one of the suggested company formation services mentioned earlier. If you decide to tackle these yourself, check with a professional advisor to make sure you’ve got all the necessary documents correctly filled out and filed during the process of setting up your limited company. We recommend:
Set up a business bank account: This keeps your business and personal finances separate. Lots of challenger banks and high-street banks offer business accounts.
Accounting essentials for your limited company
Be prepared for the responsibilities that come with running your own limited company: filing annual accounts, paying Corporation Tax, and managing your company's finances. It can be a bit overwhelming, especially if you're new to contracting.
If you need a helping hand, you might want to consider hiring an accountant with experience in working with contractors and small businesses. They can help you get through the complexities of running a limited company, optimise for tax benefits, and meet compliance standards. Or you can try accounting software to help you manage your business finances.
Is a limited company right for you?
When you run a limited company, there are more administrative tasks to complete than other options. Think about whether the benefits, like potentially higher take-home pay, outweigh the responsibilities you’ll need to take on.
Base your decision on your personal circumstances. Consider your level of income, willingness to manage a business, and long-term career goals. And if you’re looking for more personalised advice, you can always reach out to any of the suggested accountants mentioned earlier.
Contractor insurance for your limited company
When operating as a contractor through your limited company, it’s important to be protected. Many contracts will stipulate, and it's generally best practice, to have Public Liability and Professional Indemnity insurance. These shield you from potential claims that arise from professional mistakes or accidents. We recommend:
Be sure to compare policies and read reviews, so you can find a policy and provider that suits your specific contracting needs. Each provider may have unique features or cover limits that cater to certain industries or risks.
Financial breakdown for Chapter 4
Find out how much it could cost to legally establish your limited company.
The cost to register your company with Companies House or a company formation service.
Estimated cost range: £50 to £200
£
Legal and accounting services
Expert help to organise your business and figure out the best way to handle your taxes.
Estimated cost range: £500 to £2,000
Initial setup fees and the minimum amount you need to deposit.
Estimated cost range: £0 to £500
Total estimated cost range
Action Checklist: Setting up your limited company
Follow these steps to make sure you’ve got all you need to set up a limited company.
Setting up your limited company
In the next chapter, we’ll explore another route you can take: working through an umbrella company.
