How should contractors run their limited company?

The leap of faith from casual freelancer to bona fide contractor is huge. For most, the safest (and most profitable) place to land is in a limited company. By doing so, you separate your personal from your business transactions. And, of course, you unshackle yourself from any debt your business incurs.

You can create that company yourself or have a specialist inaugurate your business for you (advised!). Whichever way you favour, registering you as a limited entity places a stake in the ground and confirms your intent.

Without guidance, even the best of intentions can go awry.So we've created this guide to creating a limited company for contractors to help you begin your journey on the right path. More important, to know which are the right fruits to pick along the way.

How do you define a limited company?

The vast majority of contractors are either sole traders or operate through their own limited company.

We tend to associate the latter with IT contractors, due to the penchant for high earnings capacity in that sector. Yet limited companies can still be the most tax-efficient option for contractors on a more modest income.

Scale and fees notwithstanding, an Umbrella Company is also a viable for those new to contracting. For those earning less than £30-£35k, contracting as an umbrella employee may even be preferable.

The “limited” suffix imparts that the shareholders have disassociated themselves from the business' finances. For contractors operating as a one-man-band, they are the stakeholder - or director - in question.

In order to become an official limited company, you must register your business at Companies House. By doing so, it separates this type of trading mechanism from sole traders and Umbrella employees yet further.

The laws governing limited companies consist of both its own articles of association as well as the Companies Act. With so much to undertake, becoming an official business can seem a daunting proposition. The rewards, though, far outweigh the initial learning curve.

What’s the best way to run a Limited Company?

You must now appreciate that you're a businessperson with a brand, even if you're brand new to contracting.

The top priorities are identifying the service or product you're going to supply. One would hope you've a good idea of that already.

The second is to grow and retain a customer base to whom to supply said skill. Again, bringing industry connections from your employed role with you is a great idea. But now the shackles are off and you have a whole new sector to target as Brand You.

With all that going on, it’s impractical to expect to keep up to date with changes in taxation and compliance law, too. Unless, of course, you're well versed in these practices and your business is in the financial services sector.

Unless you have major start-up capital, you’re right to be budget-conscious at the outset. But don't perceive a lack of capital as a reason not to hire an accountant; consider it the catalyst that encourages you to do so.

Hiring an accountant to oversee the creation of your company

There’s no real mystery to registering your business name at Companies House. There are, however, many steps following its formation that build the platform of an actual business.

Once you plump for the limited company option, you must make out all trading invoices as payable to the business, not to you in person. Having all components in place to keep track of your finances from the absolute beginning is imperative.

By law, you must keep your business' records up to date. You'll also want to see whether you’re making any money. Or not.

As such, engaging an accountant to create your company and oversee its books should take care of the following:

  • registering your business at Companies House;
  • helping you set up a business bank account (by law, they cannot create this without you);
  • registering you for:
    • VAT;
    • Corporation Tax;
    • if applicable, PayRoll.

There are service providers who can create and register a business 'off the shelf'. Such providers tend to offer a package built around specific business models rather than a bespoke service.

One thing we’ve learned is that all contractors’ businesses are unique. That’s both in their scope and to the new director themselves.

So, yes, you can find cheap company creation services. But their product may not incorporate everything your business needs. And you may find yourself with plenty you don’t need.

A contractor-friendly account will help you with other aspects of running a successful business. There's much more to creating a company than creating a company.

What can an accountant do for me that I can’t myself?

Many accountancy services have access to unique accounting software. If not, they can recommend a program.

Documenting income and expenditure shouldn't be an arduous task; without software, it can be. That's because there's so much more than raising invoices and cataloguing expenses to consider.

If your business generates a large enough turnover, you'll have to submit quarterly VAT returns. You'll also have to complete and calculate your self-assessment. By entering and updating your data on a regular basis, you can halve the time and effort these legal requirements take.

A contractor accountant will help you establish how to optimise your income. They'll also outline your duties as company director. Understanding both has a huge bearing on your company's profitability.

It’s no secret. Contractors go through the pain barrier of company creation to become more tax-efficient. To achieve this, your accountant will tell you to split your income between salary and dividends.

At one time, it used to be law to appoint a limited company secretary. Whilst there’s no legal reason to do so today, you may still want to register your partner in that role. Whether that’s as a shareholder or employee will depend on your unique circumstances.

Providing you pay them a salary (a legal entitlement), there are advantages to doing either. Your accountant can expand on those benefits.

But they will involve becoming familiar with PayRoll administration and shareholder distribution. Not only how to execute them, but also their legal requirements and their benefits.

Accountants don’t often do this for free. Expect to pay anywhere between £100-£250. But for the sake of a one-off bill, it not only ensures you dot all the i’s and cross the t’s, but it also helps to cement your relationship.

Do I have to explain the advantages of having your accountant on your side? No, thought not.

Creating your own Limited Company

There's nothing stopping you foregoing an accountant and incorporating your limited company yourself. If you’re a contractor a little longer in the tooth or have a deal of inherent accounting acumen, it's not difficult.

To help you along, there's plenty of information contained at Companies House. There's also a brief overview of why you should on our Company Registration Guide's page.

Company formation agents

An alternative approach to setting up a limited company is to approach a company formation agent. But 'formation' is often the scope of their usefulness.

They’ll provide the necessary documentation to incorporate your trading name, but little else. Depending upon their price point, you may only get a company name “off-the-shelf” or a “tailor made” company.

This is not as bespoke as you’d think. You maybe get a basic template model, but the only tailoring you do is to provide the name.

You also don’t get the benefit of a contractor accountant’s experience. You’ll get little more than a package deal and basic documentation that you need from a legal perspective. You should at least get a Certificate of Incorporation and Memorandum & Articles of Association.

As alluded to above, this is an inexpensive route. There’s little difference between what you get for their basic and top-of-the-range packages. This only goes to highlight the limitations of such services.

What information do I need to provide?

To create a contractor limited company for you, your accountant will need certain information.

Some aspects, a company formation agent could help you with. Others could only come from an accountant who understands contracting (* denotes “if applicable”):

  • Who is the director?
  • Is there a secretary and other shareholders?*
  • Company’s accounting reference date;
  • Registered Office;
  • Company Bank Accountant , which you need to open, if you've not already done so;
  • Application to be VAT registered;*
  • PayRoll details;*
  • Corporation Tax application reference;
  • Accounting software package;*
  • IR35 appraisal;
  • Structure of Shareholding;*
  • Split of income, between dividends and salary;
  • Any expenses likely to form part of the budget/tax calculation.

There are many more elements to running a successful limited company business than this. But our directory of contractor accountants will find you one who can optimise your income. But going the contractor accountant route is about so much more than retaining profit.

It's as much about giving you peace of mind and allowing you to concentrate on providing your service. Should the taxman come calling, you can answer any questions about your operation in confidence.

A good accountant will ensure that you remain 100% compliant, 100% of the time. You can't put a price on that.

Author: John Yerou

John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.


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