How to set up a limited company as a contractor
Setting yourself up as a limited company can be a great way to get the most out of your role as a contractor. It allows you to take control over your financial business affairs, run your business in a tax-efficient way, and maximise your income while having limited liability.
So how do you do it and what does the process involve? James Foster, senior commercial manager at Optionis Group, parent company of SJD Accountancy, explains the process of setting up as a limited company for contracting.
Ensure that 'limited company' is the best structure for you
Before you start the process of setting up your limited company, you should be certain that this is the best structure for you, because there are other options such as operating as a sole trader and working through an umbrella company, for example.
There is no ‘one-size-fits-all’ structure for businesses and it will depend on factors such as your expected turnover; how long you intend to contract for and how much time you can set aside for running your company. Therefore, it is worth researching or speaking to an expert on how to operate, before you make the leap!
Choosing a name
You’ll need to register your limited company and to do this you’ll need to give it a name. This can be the fun part of setting up your company, but it can be frustrating too. This is because the name you choose (like your company website address) has to be unique. You may come up with a name that’s perfect for your contractor business, only to find it’s been taken. And, with hundreds of companies being formed in the UK every day, this can be quite common. Not only will you need to ensure the company name is available on Companies House, but you’ll need to avoid any words that are trademarked.
In terms of the name itself, you’ll likely want to find a name that gives people an idea of your overall trade activity, but not one that limits you too much if you do decide to change this in future. For example, ‘JF Marketing Limited’ could cover a range of different trades within marketing, so there’s a lot of leeway in what you do, but ‘JF Social Media Marketing Limited’ is a lot more specific. If you’re someone that could change your trade activity entirely in the future or do a range of different activities, then it may be an idea to steer clear of descriptive words altogether.
Registering your company
To become a limited company, you need to register with Companies House. This is an online registrar for limited companies within the UK, where you can incorporate and dissolve limited companies. On Companies House, information is available to the public on these companies, so you should be aware of this before you incorporate.
You’ll need to provide Companies House with personal information and details of your company, so the agency can identify you as the company director. This includes your company name and your company’s official legal address. So you’ll need to decide where to operate your business from – regardless of the fact that, as a contractor, your work will take you to different businesses and locations.
There are different ways to register:
- Online, using the Companies House Web Incorporation Service
- By post, of which you will need an IN01 Application form
- With a company formation agent, who you can pay to complete the process for you. Companies House provides a list of these along with the services they provide and their contact details on its website
Alternatively, many accountants will provide services in company formation too.
Decide on your company shareholding
When registering your company, you will also need to confirm the company shareholding via a ‘Statement of Capital’. This requires you to confirm how many shares the company has (including the share type, which for contractors would likely be termed as ‘ordinary shares’) and the total value i.e. the share capital).
If you are the shareholder, then you will own 100% of the company and therefore 100% of the shareholding. So, in this scenario, you may decide to issue 10 shares worth £1 each, giving a total share capital of £10. For any shareholders with over 25% of the shares, they will be classed as ‘People with Significant Control’ (PSC), and their basic details will need to be confirmed as part of the company formation.
Memorandum and articles of association
As part of the registration process with Companies House, you will also need to complete a Memorandum of Association (MOA) and Articles of Association.
The MOA is basically a legal document that informs Companies House why you have set up your company and how you plan to run it. It is also important for legal proceedings or if you’re involved in a tax dispute. For instance, it would be looked at during an IR35 case. The Articles of Association is legal documentation that includes the written rules about the running of your company agreed by you, the director. However, since the Companies Act 2006, this task is a lot easier as it gives you the option (which most applicants use) to use the default ‘Model Articles’ which is automatically created but pre-populated with information provided in the previous sections of your registration.
Registering for taxes with HMRC
After you have formed your company, you should also ensure that you register for the relevant taxes with HMRC.
If you aren’t already registered, you should register for Self-Assessment, as you’re now a director and likely to receive income that isn’t taxed at source (i.e. dividends), you will need to file a tax return each year. If VAT is applicable, you’ll need to register for this with HMRC. You can register voluntary, but you must register for VAT if your VAT taxable turnover will exceed £85,000.
If you will be paying yourself (or someone else) a salary, you should also register for PAYE, so you can make the required submissions to HMRC to confirm the salaries paid.
In terms of registering for Corporation Tax, it’s easier if you do this at the same time and as part of registering with Companies House. However, if you don’t do this and need to do this separately, you’ll need to register within three months of you starting to trade to avoid a penalty.
All of these registrations can be done via paper form or online.
Setting up a business bank account
To begin trading as a limited company, you’ll need to set up a business bank account. The finances of a limited company are considered separate to the personal finances of a company director in the eyes of HMRC, so you’ll need to have a separate account for your business in goings and outgoings -- this will also make your life a lot easier when it comes to bookkeeping.
You can set up a business account with a bank or building society of your choice. Different brands will also come with different benefits and costs, so it’s best to research the best provider for you. There are a lot of banks that can complete your application in the same day (some even within the hour!), so this should cause no delay to you starting to trade.
Getting advice and support
Now you should be all set to start operating as a limited company. There are other things to consider, such as getting the relevant insurances in place and starting to think about how you’ll be recording your income and expenditure. It will also be worth weighing up whether you could use the assistance of a professional, as although there are additional costs, they will save you time and probably a lot of stress.
An accountant, such as SJD Accountancy, can assist with all the formation requirements (as discussed above), give you tax planning advice, ensure you are complaint with HMRC by filing your accounts; tax returns, payroll submissions and the like, while also being on hand to help you throughout the year.