Your Limited Company and You — Understanding Company Structures
Independent contractors can operate as sole traders, through an umbrella company or as an employee of a limited company. The latter is often the preferred choice because it offers the most tax-efficient vehicle, although there are many other benefits that make it an attractive option.
Limited Company Structure
When you operate as a sole trader, you and the business are indistinguishable. A limited company, however, is a separate legal entity and you will be employed by the company. All contracts are with the company, income and expenses are recorded against it, it pays taxes on profits and you, as an employee and director, are remunerated through a mixture of salary and dividends.
Because the company is a legal entity, it has to be officially set up and registered with Companies House and HMRC. It must have a separate bank account, a registered office address, shareholders and directors and, although an official company secretary is no longer necessary, someone to prepare and file annual accounts and statutory returns. Much of this work can be done by a qualified contractor accountant although it is the responsibility of the directors.
Benefits of a Limited Company
Although the administration needs of a limited company are more onerous and expensive than those for a sole trader, the benefits outweigh the added responsibilities. These are:
- Tax Efficiency. Company profits are liable for corporation tax at an equivalent rate to the basic rate of income tax but without the higher rates applicable to increasing income levels. As a director, you can then take dividends that are tax free up to £5,000 and taxed at increasing rates above that. As an employee, you can be paid a salary at a level that attracts minimal NI contributions and little income tax.It is possible to pay dividends and salary to a spouse or partner to take advantage of their personal tax allowances. Additionally, you have flexibility in what you pay and when to make the most of allowances and rates. There are however strict rules that govern this, so contact us if you are unsure.
- Limited Liability. Since the company is a separate entity, you have no personal responsibility for its debts. All debts and liabilities are paid out of the company’s assets and the most you can lose is the cost of your shares (usually a nominal sum), so your own assets are safe.
- Professional Image. Operating through a limited company gives a more business-like appearance to prospective customers and others. Many agencies insist on contractors having a limited company with full insurance cover.
- Future Potential. Registering a company name protects it or a similar name being used again. There’s also the possibility of selling shares to raise capital and passing the company on to others at some point.
Company formation is included for Phoenix Cloud Accounting clients and so simplifies the process. The ongoing need to prepare and file company accounts and statutory returns is also made much easier so there’s no reason why you can’t take advantage of all the benefits a limited company has to offer. Get in touch and we can discuss a solution that works for you.