If you’re a contractor or sole trader, you may have considered what the next step of your career may be.
Setting up a limited company is thought to be the most tax efficient way of working and if you’re in it for the long term, it is definitely something to consider in order to benefit from your business.
There are over 4 million limited companies incorporated in the UK and they are quickly becoming the choice for many contractors and sole traders to give structure to working conditions.
What are the benefits of setting up a limited company?
Although there are many responsibilities that are attached to setting up a Limited company, there are many advantages too.
If you run as a Limited company, you are protected if things go wrong and you will not be personally liable for any financial losses made by the company.
As a director you can potentially save on National Insurance costs by electing to take a majority of your income in the form of dividend payments. This enables you to manage your own tax liability. Dividends are not subject to national insurance contributions.
It is easier to transfer a company to another name when it is set up as a Limited company. It is possible to transfer your ownership of shares, or other shareholders can sell their shares to another party at any time.
You can reap the benefits of owning a Limited company by only worrying about yourself. The only person you need to pay is yourself which means that you could effectively take home between 81 – 86 percent of your earnings.
Running as a Limited company also gives you more options to control how you manager your finances.
How do I get started setting up a Limited company?
The first thing to do is register with Companies House. This will include thinking of a name for your business and decide whether you will be the only shareholder. You can add extra people, i.e. spouse to hold shares. With this you will need to allocate who the director will be and must have at least one shareholder – these can both be yourself.
You will need to register your business address, this can be your home address if working from home, or your accountant’s, but cannot be a PO Box address.
It is far easier and quicker to register your company online however if you prefer to use the pen and paper route, this is still available but bear in mind that this will be a longer process.
Next you will need to inform HMRC that you have set up a Limited company to ensure you are registered for corporation tax purposes and this needs to be done within three months of trading.
In addition to this, you’re required to register your company as an employer before you can be paid. This is applicable even if you are the sole worker.
If your annual turnover exceeds £85,000 you’ll also need to register for VAT purposes.
All the above can be done via the HMRC website.
From there on you will be required to complete annual returns and pay corporation tax, all of which the deadline will be given to you by the tax office.
It is worthwhile speaking with a tax advisor or accountant in the event of confusion to ensure that everything is set up correctly.
Finally, as you have set up a Limited company, your business is separate from your personal life and therefore needs its own bank account. This is straightforward process but banks may want to see documentation to confirm the status of your company. It is worth looking at a few bank options as some offer free introductory fees for a period, which will help with getting you started.
Running your own business as a Limited company can give a more professional impression which can be beneficial when looking for new clients or to expand your business. If you’re working with larger companies, they may look on you more favourably over smaller sole-traders.
Making the decision to become a Limited company comes down to the type of work that you are performing and the clients that you are working with. If you are looking for your business to be long term, to grow and expand and to work with a variety of clients, setting up as a Limited company is the best route to go down. However, always seek advice.
When you set up a Limited company, although not mandatory, most companies will use an accountant. This is to ensure that all paperwork and finances are met to the standard that they are required by the tax office. An accountant is knowledgeable about business finance and assist in the process of running your business, so you can focus on the other aspects of running the company. The types of jobs that an accountant can perform for Limited companies are:
- Help in the formation of your Limited company (if required)
- Assistance in setting up a business bank account (if required)
- Register for VAT purposes
- PAYE registration
- Monthly Bookkeeping
- Management accounts
- Year-end accounts
- Company Annual Return (AR01) with Companies House
- Company Corporation Tax return (CT600)
- Provide references for loans, mortgages etc.
If you’re thinking about setting up as a Limited company and would like financial advice or have a Limited company and are looking for an accountant to take the pressures from you, feel free to get in touch!