Thinking You Should Set Up a Limited Company? Have You Done Your Homework?

Thinking You Should Set Up a Limited Company? Have You Done Your Homework?


Starting a limited company as a contractor is a big step. You’re moving away from being a sole trader, freelancer or umbrella company contractor, and towards a business structure that gives you more control and flexibility. For a lot of contractors, it’s a sign that you’ve made it, a milestone that shows just how much your hard work is paying off. But, that doesn’t mean you should rush into setting up a limited company, not without thinking it through first. 


At Go Limited, we know that running your own limited company comes with legal, tax and administrative duties, and these can be time-consuming. If you haven’t done your homework, you might be in for a shock. Knowing these things ahead of time can make the difference between a smooth limited company contracting process and a lot of stress.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

You have 45 days to return items for a full refund, with or without a receipt. Items must still have their original tags.

• contractor weighing pros and cons of limited company IR35

Why Contractors Set Up Limited Companies

Contractors in many sectors - such as IT, engineering, construction, finance and consulting - often reach a point where it makes sense to work through a limited company. Control is one of the main reasons, as you’re not just an employee. As the director of a limited company, you’re also running a business and making all of the decisions. This lets you plan your income, expenses and long-term finances in a more strategic way.

Another important thing to think about is what your clients expect from you. Do they purposely choose sole traders and freelancers, or do they want to work with an established, compliant limited company? A lot of clients like to hire contractors through limited companies, especially for senior or specialised positions, as it’s seen as a more professional and stable way of doing things. In some cases, having a limited company might even be necessary to secure a contract.

There’s also the appeal of being seen as a professional. When you contract through a limited company, you can improve how people see you. Instead of being seen as a temporary resource or someone who’s merely dipping their toe into contracting, you’ll be seen as an established, independent professional.

The Benefits of Setting Up a Limited Company for Contracting

There are a lot of benefits that come with running a limited company, and contracting in the way, and other ways of contracting struggle to match them. 

Increased Tax-Efficiency

If you’re a contractor who works for a limited company, you can usually pay yourself with a mix of salary and dividends. Even though tax rates change over time, this structure can still be more efficient than paying all of your tax through PAYE, especially if you make a lot of money.

Separate Personal and Business Finances

Your limited company is its own legal entity, which means it can have its own business bank account. This separation makes it easier to keep track of your money - as yours can stay in a personal bank account, to use as you please - and claim business expenses that are legal, whilst also protecting your personal property.

Protection Against Limited Liability

If your business is having money problems, it can mean disaster for your own finances, but now if you set up a limited company for contracting. When you’re a limited company contractor, your own money is usually safe as long as you have acted responsibly as a director. 

More Financial Flexibility

As a limited company director, you decide how to share the profits. This could mean paying yourself dividends, reinvesting, putting money into a pension or keeping the money for future planning. You have the freedom to be flexible.

Opportunities for Long-Term Planning

With a limited company, you can think about more than just the next contract. You can make plans for times when things are slower, tax, retirement and even adding more services. It gives you a lot of scope to grow your business and future-proof your contracting.

The Limited Company Setup Process

It doesn't take long to set up a limited company in the UK, but there's more to it than just filling out a form. The limited company setup process usually includes:

  • Registering your business with Companies House
  • Choosing a business name that is legal and free
  • Choosing the right SIC codes to show what your business does
  • Choosing directors and shareholders
  • Allocating shares
  • If you want to pay yourself a salary, you’ll need to up PAYE
  • Setting up a separate business bank account
  • Signing up for VAT, if you need to

Luckily, it’s a relatively quick and simple process, and one that most contractors manage with a little bit of help. Companies House registration can take as little as 24 hours, but it's important to make sure everything is set up correctly for tax and compliance reasons. 

As a Contractor, Are There Any Downsides to Limited Company Contracting?

Limited company contracting, like any other business structure, comes with responsibilities. It’s important to be aware of them before you get started, as you don’t want to end up taking on more than you can chew. If you run a limited company, it means:

  • Managing more paperwork than working under an umbrella company
  • Keeping accurate records of your money
  • Filing yearly accounts and confirmation statements
  • Filing Corporation Tax returns on time
  • Learning about IR35 and the rules for working off-payroll

For most contractors, these additional responsibilities are relatively easy to deal with, especially if you have the right systems and professional help. Many contractors find that once they get used to the routine of running a limited company, the ongoing admin becomes a normal part of running a business, instead of a burden.

5 Things to Know Before You Set Up a Limited Company

Whether you’ve done a bit of homework already, or you’re a complete novice when it comes to limited company contracting, there are 5 key things you need to know before getting started.

1. IR35 is Very Important

Your contracts and the way you work must be true to how you actually do things. It's important to get your IR35 status right from the very start, because it can have a big effect on how much money you take home.

2. Managing Cash Flow is Key

When you’re a contractor, you need to manage your own outgoings. Income Tax and NIC aren't taken automatically, nor are Corporation Tax and VAT. You need to plan ahead, keeping money aside for whatever might come up. This also includes keeping money aside for expenses, subcontractors, equipment, subscriptions and paying vendors.

3. You Have to Keep Records

Keeping good financial, expense and invoice records helps you to stay compliant, keeps you out of trouble with HMRC, and gives you a clear picture of how your business is doing. It’s a lot easier to see what your business has spent, what your business has made and any issues if your records are in order.

4. Getting Professional Advice Can Help

Limited company accountants - as well as experts who help you to start your business - are there to make sure that your setup meets all the rules, works well and is right for you. Though getting professional help is an extra cost, it can help you to save money in the long run, especially when it comes to maximising tax deductible savings and avoiding penalties.

5. Your Own Situation Matters

When you’re making the decision whether or not to set up a limited company, you should think about your own situation. Factor your income level, the length of your contracts, your family situation and your financial goals into things. Setting up a limited company works for a lot of contractors, but it might not be the best move for you right now.

Alternatives to Limited Company Contracting

Though setting up a limited company works for a lot of contractors, it’s important to consider all of your options, and there are a few.

Umbrella Company Contracting

Working under an umbrella company is easy because it has little paperwork and PAYE handles Income Tax and NICs. It can work for short-term contracts or people who are new to contracting, but it usually means less money in your pocket.

PAYE Employed Work

Permanent jobs offer job security and benefits, which some contractors miss out on, but they don't offer the flexibility and earning potential that many contractors want.

Sole Trader

Being a sole trader is simple to set up and it’s where a lot of contractors start, but it’s not always the best choice if you want to work with agencies or big clients, due to liability and compliance issues.

At Go Limited, we think it’s easy to understand why limited company contracting is still one of the most popular and useful options for contractors who want flexibility, professionalism and control. Setting up a limited company doesn't have to be hard if you have the right help and advice. In fact, it can be the start of a contracting future that is more profitable, flexible and confident, and who can say no to that?


accountant advising on IR35 compliance

FAQ's

 

What does it mean to run a limited company?

Running a limited company means operating a business that is legally separate from you as an individual. The company has its own legal identity, can enter contracts, own assets, and be responsible for its own debts. As a director and usually a shareholder, you manage the company while benefiting from limited liability, meaning your personal assets are generally protected if the business runs into financial difficulty.


What are the main advantages of running a limited company?

One of the biggest advantages is limited liability, which protects your personal finances if the company fails. Limited companies can also be more tax-efficient than sole trading, particularly for contractors and higher earners, as profits can be taken as a mix of salary and dividends. In addition, limited companies often appear more professional to clients, which can help win contracts and build trust.


What are the main disadvantages of running a limited company?

The main downsides are increased administration, stricter compliance requirements, and higher running costs compared to being a sole trader. Directors must file annual accounts, a corporation tax return, and confirmation statements, as well as manage payroll if they pay themselves a salary. There is also less privacy, as company details are publicly available via Companies House.


Is running a limited company tax-efficient?

For many people, running a limited company can be tax-efficient, particularly when profits exceed a certain level. Corporation tax is paid on company profits, and directors can then extract income using a combination of salary and dividends. However, tax efficiency depends on individual circumstances, current tax rates, and future legislative changes. What works well for one person may not be suitable for another.


How much administration is involved in running a limited company?

Running a limited company involves more administration than other business structures. Directors are responsible for maintaining accurate records, submitting statutory accounts, filing corporation tax returns, and meeting HMRC deadlines. Many company owners choose to hire an accountant to manage these obligations, which reduces stress but increases costs.


Do I need an accountant to run a limited company?

Legally, you are not required to hire an accountant, but most directors of limited companies choose to do so. Accountants can help ensure compliance with regulations, minimise the risk of errors, and offer valuable tax planning advice. Given the complexities of company accounts and tax regulations, seeking professional support is often seen as a worthwhile investment, especially for contractors and first-time directors.


How does limited liability protect me?

Limited liability means that, in most cases, your personal assets such as your home and savings are protected if the company becomes insolvent. You are usually only liable for the money you have invested in the company. However, this protection is not absolute. Personal guarantees, wrongful trading, or unpaid taxes due to misconduct can still expose directors to personal liability.


Can I take money out of a limited company whenever I want?

No, money belongs to the company, not you personally. Funds can only be taken out in specific ways, such as salary, dividends, expense reimbursements, or repayment of a director’s loan. Taking money incorrectly can lead to tax issues or penalties, making it important to understand the correct procedures.


Is running a limited company suitable for small or part-time businesses?

Running a limited company can be suitable for small or part-time businesses, but it may not always be the most cost-effective option. If profits are low, the additional costs and admin may outweigh the benefits. Many people start as sole traders and incorporate once their income increases or their business becomes more established.


How does IR35 affect limited company contractors?

IR35 rules determine whether a contractor is genuinely operating as a business or should be taxed like an employee. If a contract is inside IR35, the tax benefits of running a limited company are significantly reduced. Contractors affected by IR35 must carefully assess whether operating through a limited company still makes sense for their situation.


Are limited company details publicly available?

Yes, limited company information such as director names, registered office address, and annual accounts are publicly accessible via Companies House. While this promotes transparency, some directors see it as a disadvantage due to reduced privacy compared to sole trading.


What ongoing responsibilities does a company director have?

Directors have legal responsibilities to act in the best interests of the company, keep accurate records, file accounts on time, and comply with tax and employment laws. Failure to meet these responsibilities can result in penalties, fines, or disqualification as a director.


Is it easy to close a limited company?

Closing a limited company is more complex than stopping sole trading. The process depends on whether the company is solvent or insolvent. A solvent company can usually be closed through a voluntary strike-off, while insolvent companies may require formal liquidation. Professional advice is often recommended.


When does running a limited company make sense?

Running a limited company often makes sense when you earn consistent profits, want to protect personal assets, or need a more professional business structure. It can also be beneficial for contractors working with larger clients who prefer or require limited company engagement.

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Speak to a Specialist

Important

 

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.

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