Is a Limited Company Right for You? Advantages and Drawbacks Explained

What Does Working Through a Limited Company Entail?

Contracting through a limited company means forming a separate legal entity that can enter into contracts, own assets and be liable for its own debts. When you’re a sole trader, you and your business are considered to be joined. But, when you set up a limited company, there’s a clear separation between the two. You are the company director and shareholder, and the limited company is a separate entity.

This means that you can pay yourself a combination of a salary and dividends, which can lead to tax efficiencies. But, you’ll be responsible for ensuring the company complies with legal and financial requirements - such as submitting annual accounts, paying tax and keeping proper records - which can be time-consuming. This is why it’s important to weigh up the pros and cons of working through a limited company. 

Setting Up a Limited Company for Contracting

The process of setting up a limited company is relatively straightforward, but it’s not quite as simple as declaring yourself a limited company owner and leaving it at that.

Choose a Company Name

Your company name must be unique, not infringe on any existing trademarks and end in "Limited" or "Ltd".



Register with Companies House

You’ll need to provide details to Companies House, including your company name, registered office address, director details and shareholder information. 

Set Up a Business Bank Account

As a limited company is a separate legal entity, you need to set up a business bank account. All business income and expenses should go through this account.

Register for Corporation Tax

Once your company is registered, you need to inform HMRC within three months of starting business activity so they can set up your Corporation Tax account.

Organise VAT Registration

If your turnover exceeds £90,000 VAT registration is mandatory. However, many contractors voluntarily register for VAT to take advantage of schemes like the Flat Rate Scheme.

The Benefits of Working Through a Limited Company

You won’t be surprised to find that working through a limited company has a lot of benefits; it’s why so many contractors swap from being sole traders.

Tax Efficiency

The main benefit of setting up a limited company is the ability to optimise your take-home pay. Instead of taking a full salary, you can pay yourself dividends, which are taxed at a lower rate, resulting in more money in your pocket. With strategic planning, you can also benefit from the tax-free dividend allowance and pension contributions. 

Limited Liability Protection

If your company incurs debt or legal action, your personal assets are protected if you have a limited company. This is a key difference from sole trading, where you are personally liable, which puts your assets at risk.

Professional Credibility

Clients, especially larger organisations, often prefer to work with limited companies. It gives the impression that you’re a more established, serious business. It might also be a requirement for certain contracts. By working through a limited company, you open yourself up to the potential of bigger, better contractors.

More Control Over Income

As a limited company contractor, you decide when and how to pay yourself, which allows for better financial planning. You can defer dividends or allocate funds based on your needs, making sure you get the most out of your hard-earned cash.

Business Expenses

A wide range of expenses can be claimed through a limited company, including equipment, travel, software and training, which can reduce your taxable profits. If you choose to work through an umbrella company, you don’t have access to the same expenses.

The Downsides of Working Through a Limited Company

Of course, along with the whole host of limited company benefits, there’s bound to be a downside of two. Here are some of the challenges you might face.

Administrative Responsibilities

Running a limited company involves a significant amount of paperwork, including payroll, VAT, annual accounts and confirmation statements, and that’s just some of them. This gives you more to do as a contractor, and failing to comply with the admin side of things can lead to penalties.

Ongoing Costs

Though it doesn’t cost a lot to set up a limited company, there are ongoing costs to factor in. You’ll likely need an accountant - unless you have the time and skills needed to handle bookkeeping yourself - insurance policies and possibly software subscriptions for invoicing.

IR35 Risks

You can’t be a contractor without understanding IR35. Determining IR35 status is complex and misclassification can be costly, and it’s not a risk you’ll want to take. If you're found inside IR35, the financial advantages of your limited company structure are reduced.

Cash Flow Management

As a limited company contractor, you are solely responsible for making sure your business has enough money to pay salaries, taxes and expenses, which requires careful budgeting and forecasting. If you drop the ball, you could find yourself in hot water, scrambling around trying to stretch your budget.

Does Limited Company Contracting Always Come Out on Top?

No two contractors are alike, so it’s impossible to say that limited company contracting is the ideal route for everyone. But, more often than not, it does come out on top. A limited company can be significantly more tax-efficient and flexible, especially for those working on longer contracts, earning a decent wage annually, or those planning to build a professional contracting brand. It’s important to remember that the benefits of working through a limited company somewhat disappear if most of your contracts are inside IR35, or if you only work on the occasional project.

To put it simply, the limited company structure works best for contractors who want to take control of their business and are comfortable managing the responsibilities that come with it. If you’re not comfortable managing the responsibilities that come with it, you need to be happy to enlist the help of a professional to handle things on your behalf.

How to Decide if Working Through a Limited Company is Right for You

To set up a limited company full of confidence that it’s the right choice for you, you need to have weighed up the benefits and challenges, and then asked yourself some key questions. 

Am I regularly working outside IR35?

 If your work often falls inside IR35, the limited company model loses a lot of its advantage. But, if the majority of your contracts are outside IR35, the additional work associated with limited company contracting is likely to pay off.

Am I willing to manage the admin or pay someone to do it?

There’s a lot of additional paperwork that comes with being a limited company contractor, and you need to be willing to manage it or pay someone else to. If not, the ease of an umbrella company may outweigh the savings.

Do I want to build a long-term business brand?

A limited company gives you a platform to scale and grow, but that’s only a benefit if you plan to contract for a while. If you’ve only taken on a handful of contractors, and you’re not sure what the future looks like for you, it might be best to wait. 

Transitioning from a sole trader to limited company contractor is more than just a paperwork exercise. It's a shift in how you manage your business, income and professional relationships. While it offers increased income potential, legal protection and business credibility, it also requires a willingness to take on more responsibility. So, before you start the process of setting up a limited company, do your research and consider the pros, cons and responsibilities.

At Go Limited, we know how beneficial a limited company can be, but we also know that getting everything sorted takes time. Luckily, we’re here to offer guidance, giving you the best chance of success. For us, the focus is on helping you to work through a limited company in a way that pays off and drives your contracting journey forward.