Setting up a Limited Company

Aside from sole trader status, most contractors set up their small businesses as Limited Companies.

The term ‘limited’ derives from the fact that the company’s finances are distinct from the personal finances of their owners (unlike the sole trader arrangement).

Shareholders in limited liability companies are not responsible for company debts, although if required, directors may be required to guarantee loans or credit granted to the company.

Setting up a limited company using an accountant

If you are new to contracting and are unfamiliar with the taxation rules and regulations then choosing an accountant to set up your limited company is probably the easiest and most efficient method of setting up a limited company. Choosing a specialist contractor accountant will be able to offer you a full service and get you up & running and ready to trade with your company. Click to view our directory of contractor accountants.

By choosing an accountant to deal with your ongoing work they will provide you with a formation package which usually consists of the following aspects:

Providing the limited company
Applying for a company bank account
VAT registration
Payroll registration
Corporation tax registration
Other minor formalities

They will also:

Set you up with a simple accounting system like a spreadsheet
Explain your responsibilities as a company director
Establish the amount of your salary
Help determine and agree your IR35 status
Establish shareholding structure
Deal with other minor issues following formation

Most contractor accountants will charge contractors between £95 to £250 for this type of complete service, depending on what is included in the package.

Setting up a limited company yourself

Depending upon your accounting knowledge, some contractors choose to incorporate their limited companies themselves. Further details can be found at www.companies-house.gov.uk. Contractor UK has guides on How to Choose a Limited Company Name as well as legal considerations in this article - CUK's legal guide to naming a limited company.

Further information on running your limited company as an IT contractor is available on Contractor UK. CUK also have a Directory of contractor accountants. You should also read about your legal responsibilities as a company director

Setting up a limited company using a company formation agent

Another approach to setting up a limited company is to use a company formation agent. Company formation agents are not accountants but they will simply supply you with either an “off the shelf” company or a “tailor made” company, where you can choose the name.

Company formation agents will only supply you with a limited company package, including the Certificate of Incorporation, Memorandum & Articles of Association and certain other Companies House forms.

Unlike a contractor accountant, a company formation agent will not provide you with the necessary details and help in getting you into a position of being able to trade under your limited company. This will also mean that they will be unable to explain to you your legal responsibilites as a company director.

Formation agents typically charge from £45 for the service and the product supplied actually varies very little between the cheapest and most expensive.

There are a number of issues that will need to be considered when setting up a limited company. These include the following:

Appointment of Director
Appointment of Secretary
Accounting reference date for the company
Registered office address
Opening of company bank account
VAT application
Payroll scheme application
Corporation tax reference application
Accounting system set up (a simple excel spreadsheet should suffice for a one person company)
IR35 status of your contract
Shareholding structure
Salary levels
Expenses to be claimed