Setting up a contractor limited company

The steps required to set up a contractor limited company are straightforward. In this guide, the following details are included:

  • the six requirements needed prior to setting up a contractor limited company
  • registering the company with Companies House
  • registering with HMRC for Corporation Tax and, if applicable, PAYE
  • the benefits of setting up a limited company when contracting

In this post we also evaluate the differences between a standard accountancy practice and an accountancy practice dedicated to servicing contractor limited companies.

Setting up a contractor limited company

When setting up a limited company for contract work, the procedure is as follows:

Choose a company name– a contractor is free to choose the name of their company as long as the name does not sound or read like another company’s name and as long as it contains no “sensitive” terms.

Choose a company address– a contractor limited company must have its own correspondence address which is a physical address in the country of registration and which is not a PO Box number.

Appoint a director or directors– there must be at least one director who is over 16 and has not been banned by the Court from being a director. Each director must provide a service address at which they can receive correspondence.

Create and distribute shares– shares determine the ownership of a contractor limited company. Those who hold shares will normally have the right to vote on and agree to proposed changes within a company. There must be at least one shareholder and there is no maximum number of shareholders.

Upon registration, shareholders will present a “statement of capital” which shows the number of shares a company has, the total value of those shares, and the division of ownership between the shareholders.

Create a Memorandum of Association– this is a legal document signed by the shareholders resolving to form a contractor limited company.

Create Articles– this is a set of written rules about company governance signed by directors, shareholders, and, if applicable, the company secretary.

Template Memorandum of Association and Article documents can be downloaded online.

If there is to be more than one shareholder or director who is actively building the business, most solicitors advise that a partnership agreement would be advisable in case of dispute between the shareholders.

Registering your limited company

When setting up a limited company, a contractor who has followed the six steps above must then register the business with Companies House. Upon successfully registration, a company number is issued by Companies House and the formation of the company is now complete.

There is a Government website portal at which a company can be registered – the link is here.

Alternatively, an accountant, solicitor, or company formation agent can register the business on a contractor’s behalf.

Informing HMRC when setting up a limited company for contracting

A director is legally required to register for Corporation Tax upon receipt of a company number from Companies House. If a contractor limited company is intending to employ staff at launch or soon thereafter, the company must register with HMRC for PAYE.

Benefits of setting up a limited company when contracting

When questioned, contractors who use a limited company vehicle to carry out business identify to their accountants the following benefits:

Take home pay– statistics indicate that a contractor using an umbrella firm will receive around 65% of their contract rate in take home pay after tax, umbrella company fees, and recruitment agency fees. Limited company contractors, on average, receive 80-85% of their contract rate as take home pay.

Tax efficiency– contractors using an umbrella firm are on the Pay As You Earn (PAYE) scheme against which a restricted set of expenses can be claimed back to reduce the tax they pay. Limited company contractors can claim tax back against a much wider range of products and services. Limited company contractors using flat rate VAT scheme are also able to retain a small portion of the VAT they charge to clients.

Control– limited company contractors benefit from total control over the majority of the aspects of their business. Contractors using an umbrella service generally depend on others to find them new client work, manage their paperwork, pay their taxes, and build their career.

Although umbrella contractors benefit from standard employment rights (including parental leave and holiday pay), limited company contractors choose this structure because they prefer to be in charge of the companies for which they work, the fees that they charge, and how much tax they pay.

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