The Benefits of Setting Up a Limited Company
The Benefits of Setting Up a Limited Company
If you're a freelancer, contractor or sole trader, you might have considered setting up a limited company. At Go Limited, we understand why, as there's a whole host of benefits that come with being a limited company contractor. Below, we've taken a look at the advantages of setting up a limited company, and why it's the 'go to' route for many professionals in the UK.
Limited Company Deep Dive
There are a few different ways to structure a business in the UK, but a limited company is certainly one of the most popular. With a limited company, you have a separate and legally recognised identity for your business, which protects your personal assets and boosts your professional credibility. This is called limited liability, and it means that if your business runs into trouble, your personal assets - such as your savings, house or other assets - are usually protected. Limited companies are often set up by freelancers, contractors, consultants, and small startups who are ready to take their business to the next level.
What is a Limited Company?
As a contractor, you have the option to set up a limited company. The business can own assets, enter contracts, borrow money and run into legal issues independently of you, which isn't the case when you're contracting as a sole trader. Ownership of the business is divided into shares, which are owned by shareholders. You're automatically one of the shareholders as the person who sets the limited company up, but you might decide to take on others as your business grows. Most contractors start off being the sole director and sole shareholder of their limited company, but there's nothing stopping you changing that up eventually.
Once you've set up a limited company, the company needs to pay Corporation Tax on its profits, and you need to pay tax on any income you personally receive - such as dividends or salary - as a shareholder. This might sound costly, but contracting through a limited company is often a more cost-effective way of doing things.
What Does Setting Up a Limited Company Entail?
Setting up a limited company is relatively simple, a lot simpler than many people realise. Once you've chosen a unique company name - you have the freedom to be creative with your business name, as long as it's not already in use or too similar to an existing business' name - you can decide on the structure of your limited company. You'll need to appoint at least one director, who is responsible for the day-to-day running of things, and at least one shareholder to own the business. For most contractors, both of these people are you.
You'll also need to register your limited company with Companies House, which is done online.
You'll need to provide the company name, director and shareholder details, your registered office address and various documents, such as a memorandum and articles of association. You'll also need to register your company for Corporation Tax with HMRC within three months of starting trading and set up a business bank account, as your business finances need to be separate from your personal accounts.
Who Can Set Up a Limited Company?
There are very few limitations in regards to who can set up a limited company in the UK, but there are some basic criteria that need to be met. For example, you must be over 16 years old and not be undischarged bankrupt or disqualified from being a company director. You'll also need to have an address within the UK to use as a registered office.
People in all industries can set up a limited company, regardless of the work you do, your sector and the type of projects you work on. However, it's an especially popular route for freelancers and contractors working in IT, consultancy and creative fields.
The Benefits of Contracting Through a Limited Company
Tax Efficiency - One of the main benefits of setting up a limited company is the potential to save money on how much tax you need to pay. As a limited company director, you can pay yourself a low salary and make up the rest in dividends payments, which are taxed at a lower rate than salary. This can reduce your tax bill, keeping more money in your pocket.
Limited Liability Protection - When you're contracting via a limited company, your personal assets are protected if the business faces legal action or insolvency. You're only liable for the amount you invest or guarantee - which is typically the value of your shares - and not the full amount. This is important if the business falls into debt and can't keep up with repayments.
Increased Professional Credibility - Having a limited company can boost your professional credibility, as clients, suppliers and investors can see that you're taking things seriously. They'll have greater confidence in your operation, making them more likely to choose you over your competitors.
More Control Over Finances - As a limited company contractor, you have full control over how and when you take money out of your business. This allows for more strategic tax planning, keeping more money in the business. You also have the freedom to decide how profits are reinvested or distributed, and when.
Wider Range of Contracts Available
- There are some clients, such as large corporations and some government bodies, who only work with limited companies due to legal and insurance reasons. If you're operating through a limited company, these contracts are available to you.
Are There Any Downsides to Limited Company Contracting?
As you can see, there's a whole host of advantages that come with operating through a limited company. But, that doesn't mean there isn't a downside or two. For example, running a limited company involves regular filings, record keeping and correspondence with HMRC and Companies House. This is a lot more admin for you to keep on top of, which can be a pain. There's also the chance of higher accounting costs. Though they're unlikely to be excessive, you'll likely need to pay a professional accountant to ensure you remain compliant.
Managing taxes, compliance and director duties can be daunting at first, especially if you're handling everything for the first time. Luckily, there's a lot of help out there, and experts can handle a lot of limited company complexities for you. It's also important to remember that if you're a contractor and your role falls inside IR35, the tax advantages of a limited company can be reduced.
You won't receive statutory benefits such as paid holidays, sick leave or redundancy when you're working via a limited company, unless you set them up and fund them through your company. This is something to bear in mind when you're deciding how to approach contracting.
Key Things to Remember When You're Setting Up a Limited Company
If you want to set up a limited company and have the highest chance of success, you need to keep a few key things in mind.
1. You Must Stay Legally Compliant - This means filing annual confirmation statements and company accounts with Companies House, submitting a Corporation Tax return to HMRC, and keeping proper accounting records and receipts. Failure to meet deadlines can result in penalties or your company being struck off the register, so staying compliant isn't something to overlook.
2. Understand Your Tax Obligations - There are various tax obligations that come with setting up a limited company. For example, you need to pay Corporation Tax on profits, your salary is subject to PAYE, and dividends are taxed separately. You need to understand these obligations to ensure you're not making any accidental mistakes.
3. You Are Responsible as a Director - Even if you're the only person in the business, and you operate largely as a solo contractor, being a company director means that you're legally responsible for how the business is run. This includes keeping records, acting in the business' best interest and ensuring accounts are accurate.
4. Open a Dedicated Business Bank Account - Opening a business bank account isn't optional, it's a necessity if you want to ensure your finances are in order. Mixing personal and business funds can lead to confusion, errors and even legal issues, especially when it comes to claiming allowable limited company expenses.
Setting up a limited company is a worthwhile move that can bring substantial financial, professional and legal benefits, but only if you do it right. Being a limited company contractor offers flexibility, protection and the potential for greater take-home pay, and the Go Limited experts are here to ensure you're always on the right page. With the right planning and Go Limited support, operating through a limited company can drive your career forward.
Frequently Asked Questions About the Benefits of a Limited Company
1. What are the main benefits of becoming a limited company?
Forming a limited company can offer tax efficiency, limited liability protection, and enhanced credibility. It separates your personal finances from your business, making it easier to raise funds and win contracts.
2. What is the benefit of a limited liability company?
A limited liability company (Ltd) means shareholders are only responsible for the company's debts up to the amount they have invested. Your personal assets, such as your home or savings, are usually protected.
3. How does a limited company benefit the country?
Limited companies contribute to the economy by creating jobs, paying corporation tax, and often encouraging investment and innovation. They can also attract foreign investment and boost industry standards.
4. What are the advantages of having a private limited company?
A private limited company (Ltd) has more control over ownership and decision-making than a public limited company (PLC). It offers limited liability, privacy for financial information, and flexibility in profit distribution.
5. Can a director of a limited company claim benefits?
Yes, but eligibility for government benefits depends on your personal income, not the company's earnings. Directors who take a small salary may qualify for certain benefits, though this should be discussed with an accountant.
6. Does a limited company have tax advantages?
In many cases, yes. Profits are subject to Corporation Tax, which may be lower than higher-rate personal income tax. Directors can also use dividends for tax-efficient income, within HMRC rules.
7. What is the difference between a limited company and being self-employed?
Self-employed individuals are personally liable for business debts and pay income tax on all profits. Limited company owners benefit from limited liability and can often structure income in a more tax-efficient way.
8. Can I start a new limited company alongside another business?
Yes, you can own or direct multiple companies. Each must be registered separately with Companies House, and each will have its own accounts and tax responsibilities.
9. How does being a limited company improve credibility?
Many clients, especially larger organisations, prefer working with limited companies. Registration at Companies House gives an official status that can help secure contracts and partnerships.
10. Are there any downsides to being a limited company?
Yes. There are more administrative responsibilities, such as filing annual accounts and confirmation statements, and you must follow stricter record-keeping and reporting requirements.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
