Office of National Statistics figures suggest that there are nearly 2 million contractors, freelancers, and self-employed professionals in the UK. When providing their services, contractors generally select one of two legal structures to carry out business – as a limited company or by joining an umbrella company.
A contractor limited company is a separate legal identity to its directors and any other person who holds shares in that business. If a director or shareholder resigns, dies, or is made bankrupt, that is a personal matter to the director or shareholder – the company will still continue to exist.
A contractor limited company has its own bank account, can take on debt, sign contracts, make profits, and make losses. Contractor limited companies have a separate taxation system to individuals.
The money in a limited company bank account belongs to the limited company – the money does not belong to the shareholders or directors.
Shareholders are not personally liable for any debts the company owes or contracts of service the company signs. Contractor limited companies offer shareholders “limited liability” meaning that, should a company become insolvent, shareholders are liable to pay to the company what they paid to own the shares. Any funds remaining following dissolution will then be distributed to the company’s creditors.
Each contractor limited company has its own internal rule book called the Articles of Association that it must follow as well as the requirements contained in the Companies Act 2006.
Compared to contracting under an umbrella company, there are far more rules that a limited company and its shareholders must follow. However, limited company contractors using an online bookkeeping system and working with the right accounting firm offers significant tax advantages as well as affording a contractor much more freedom over their clients and careers.
- Contractor will own the shares and be the director of the ltd co – for this reason they are often called a personal service company (psc)
- Limited co will engage with end client or agency to do the work
- Limited co will invoice the end client or agency for the work
- In return for doing the work on behald of the ltd co, the director will be paid a salary
- This salary comes out of the company bank account, and any tax due on it is sent from the company bank account to HMRC (this calc is often done by an accountant but the money itself is sent by the director on behalf of the ltd co from the company bank account)
- Some expenses can be offset against the profit the company makes on that contract.