Best ways to set up a limited company: ranked

Alongside our April 6th tax-induced offer to set up contractors with a free limited company bank account, we’d like to also offer guidance on the actual process of setting up a contractor limited company.

It doesn’t take long but it’s not an insignificant task, deserving consideration beyond the ‘nuts and bolts’ of company formation – which I’ll tick off here in a handy checklist, writes Nick Biggam, a director of Zempler Bank.

Why limited companies (still) don’t have limited appeal

Despite a much-disliked HMRC tax rule that I’ll cover, there are still plenty of reasons to set up a limited company.

You may be just starting out and want to hit the ground running with your own official business, or you’ve been operating as a sole trader or via an umbrella company and want a bit more ownership over your contracting career.

Control, professionalism, protection

Whatever your motivation, becoming a limited company gives you greater control over your finances. It provides a platform on which to build a professional brand. And unlike being a sole trader, incorporating a business gives you a separate legal entity that affords you a degree of personal protection from your business.

And while umbrella companies can be great for taking care of admin and paperwork, 'going limited' puts you in the driving seat.

Why will umbrella contractors who were once limited companies be groaning right about now?

The umbrella versus limited company ‘issue’ is particularly important for contractors.

That tax rule I mentioned, IR35, which is designed to stop contractors working as ‘disguised employees’, may be a deciding factor in whether it’s worth setting up as a limited company at all.

IR35 was introduced in 2000 but reformed in the public sector on April 6th 2017 and in the private sector on April 6th 2021, with the effect of shifting the decider of IR35 status from contractors to end-clients. Only under the 2000 rules (only applicable today to ‘small company’ clients,) is the decision still with contractors.

Make sure you understand your likely working status, including the types of roles you’d likely go forward for in terms of their IR35 status, and whether you’d fall inside or outside IR35 (at least under the framework of 2000) before forming a limited company.

How to form a limited company: 3 ways, traditionally

Traditionally, there have been three options to form a limited company, each with its own pros and cons.

1. Via Companies House

2. Via an Accountant

3. Via a Company Formation Agent.

Let’s take each, in turn -- even if we have ranked them in reverse order of what we think is best nowadays.

1. Going Direct’ – registering a new limited company with Companies House

You can register directly with Companies House, the UK’s registrar of companies.

This means you won’t need to pay a third party like an accountant to set up the company for you.

All you’ll have to pay is the company incorporation and registration fee (which increased to up to £78 on May 1st 2024).

The downside of ‘going direct’ (when you alone incorporate with Companies House) is that you have to navigate the process of setting up the business yourself. That includes selecting what products and services you’ll need from Companies House, understanding the legal requirements, and completing a fair bit of paperwork correctly.

The online government guidance is pretty good, but it still takes time to sift through it all to be fully compliant. There’s also Companies House’s May 2024 requirements to consider and not miss.

2. Hire an accountant and get them to form a firm for you

Working with an accountant from the outset is a safe, time-saving approach that comes with reassurance.

An accountant can provide advice on the most tax-efficient beneficial ownership and director structure for your specific needs.

A structure like this is easier to set up at the outset rather than further down the line.

You’ll have to pay for the services of an accountant (standard packages tend to include company formation). So bear in mind that for simple, straightforward businesses, using an accountant to incorporate is a more expensive approach.

3. Engage a company formation agent

Online company formation agents specialise in setting up limited companies, and quickly. They’re dedicated to it – forming companies fast is all they do (unless you’re not fussed about ‘same day formation’ which Companies House charges less for).

Using a limited company formation agent, contractors can choose from different packages with varying features and levels of support. Find the one that best meets your budget and needs, and you’re away!

Agents can be an easy and efficient way to get set up a business without the cost of an accountant, or hassle of doing it yourself. Just make sure to do your research, compare options and choose a reputable agent.

The fourth way? Use your bank as your limited company launchpad

Last and definitely not least, it's pleasing that the landscape is evolving.

Banks are now offering another way to form a limited company, often with perks thrown in. 

For our part, we’ll help you set up a limited company as long as you open a business current account at the same time. Sometimes, cash incentives are offered as well. And yes, we do those too!

Contractors tell us it’s a pretty attractive option. There’s no accountancy firm to take on, and no having to do it all entirely yourself. 

It’s also cost-efficient, and streamlines the process by setting up your company and business bank account simultaneously. So, two birds…

The nuts and bolts of setting up your limited company: eight to tick off

Regardless of your preferred way to set up a limited company, you’ll need to consider these eight key elements when registering a business:

1. Company name: Choose a unique, professional name that meets Companies House rules.
2. Registered office address: Your company’s official address for correspondence. It doesn't have to be your work location.
3. Registered email address: Your company’s registered email address. It won’t be publicly available, but Companies House will use it to communicate with you as the company’s director. It’s been a requirement on all new incorporations since March 4th 2024.
4. Shareholders: For individual contractors, you’ll usually be the only shareholder.
5. Directors: You’ll also usually be the sole director, with responsibility for legal compliance and managing the company day-to-day.
6. Memorandum and Articles of Association: Your company’s governing documents; don’t lose them!
7. Share Capital: Set the number and value of your company’s shares. For small businesses, this is usually a nominal amount.
8. Person with Significant Control (PSC): Register anyone who has significant control of your business. For contractors, this will likely just be you.

And finally, potentially complex company formation is getting simpler...

Setting up a limited company might seem complex at first. But there are options and with new, convenient bank-offered formation services, it’s becoming quicker, easier and more accessible.

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Editor's Note: The content of this article is not guidance from Zempler Bank.

Zempler Bank makes no representations or warranties of any kind, explicit or implied with respect to the contents of this article. Without limitation, Zempler Bank specifically excludes and disclaims all express or implied warranties and conditions to the extent permitted by law, and any action taken using such content is strictly at the user’s risk.