Whilst many contractors may start on a self-employed basis, most generally convert to limited company status at some point. Although this does impose various obligations as well as additional administration and increased costs, there are several benefits:
- reduced tax and NI payments
- limited liability for debts since the company is a separate legal entity
- increased credibility for potential clients
More importantly though you gain control over your finances. You no longer have to rely on some shady umbrella company that promises the world and then closes down as soon as the HMRC comes knocking – taking your fees with them and leaving you with the tax bill! Furthermore, you avoid any issues with agencies forcing you onto their list of preferred suppliers – chosen not for their ability but for their kick-backs offered.
The process of setting up a limited company has been simplified to some degree but there are still specific tasks and obligations involved in the process. These are:
- Choose a company name that’s not already in use. This can be checked against a list available from Companies House. However, the trading name, by which your company is generally known, can be different to the registered company name so the latter may not be too significant.
- Appoint at least one director, who will generally be you. You cannot be a director if you are under sixteen, an undischarged bankrupt or are disqualified from acting as a company director. It’s no longer necessary for a private limited company to appoint a company secretary since any director can undertake the relevant tasks.
- Determine your registered office address to which official correspondence will be sent. This can be your trading address or is often that of your accountant.
- Set up the official memorandum of association that provides company details and the articles of association that sets out company rules and regulations. Standard versions can be obtained from a legal stationer or company formation agent.
- Register the company with Companies House by completing and sending form IN01, which supplies all the necessary information.
- Issue shares to one or more shareholders, generally to yourself and possibly your spouse. Shares in a private limited company cannot be sold publicly.
Once your company is set up, you will have certain obligations for which you or your accountant are responsible each year:
- File annual accounts that have been independently audited with Companies House before the required date to avoid a fine.
- Provide an annual return to HM Revenue and Customs, setting out the annual taxable income and profits.
- Pay Corporation Tax on profit within nine months of the year end.
- Distribute dividends, which will often be your main source of income to minimise tax.
- Complete a self-assessment form and submit to HM Revenue and Customs to account for personal tax and NI, which are payable by the due dates.
You also need to be mindful of IR35 legislation which may limited what you can and cannot do from an accounting point of view.
Although everything becomes simpler once you’ve done it for the first time, all this might seem a little overwhelming initially. If you chose any of Phoenix Cloud Accounting’s packages, however, company formation is automatically included and so the set-up is done for you. Added to that, your ongoing legal obligations will be handled as part of the package and you won’t have to worry about failing to do something and incurring penalties as a result. Contact us today to discuss your options, and take control of your own financial future.