What is a limited company?

There are two main types of payment structure for self-employed contractors and freelancers. Limited companies and umbrella companies. Both of which offer certain advantages depending on your personal circumstances.

This article focuses on the pros and cons of operating a limited company. So, if you need more information on umbrella companies and how they operate click here. Or, check out our FREE GUIDE for a direct comparison between going limited and going umbrella.

What is a Limited Company?

Limited companies now account for the majority of UK businesses. But what are they? Well, a limited company is a business that’s been incorporated at Companies House. ‘Incorporation’ is the process by which a new or existing business registers as a limited company. They’re either limited by shares or limited by guarantee. Once incorporated, a limited company becomes its own legal entity. It is separate to the people who run or own it. This means, for instance, that the company can enter into contracts – and can be sued – in its own right.

The money a limited company makes from sales belongs to the company, rather than the individuals that run it. Furthermore, the company’s directors and shareholders cannot withdraw capital from the company whenever they like. Instead, they should get paid by the company in the form of salaries and dividends.

How does a Limited Company work?

Using an example, here is a brief overview of how a limited company is set up and how they work in practice:
  1. Connie is a contractor who provides services for multiple clients. Her contracts are often longer-term and her earnings tend to be above £15-an-hour.

  2. Given these circumstances, Connie’s accountant advises her to go limited. So, she decides on a company name and address, and gets her documentation in order. She then incorporates her business at Companies House.

  3. With her business registered, Connie becomes the sole director – and shareholder – of her own company. Whenever the company makes money from a sale, it belongs to the company.


  4. So, while the business builds up clients and capital, Connie pays herself through a combination of [director] salary and [shareholder] dividends. The company may also reimburse her for any of the business costs she pays for personally.


Should I set up a Limited Company?

If:
  1. Your contracts are often longer-term
  2. Your rate is above £15-an-hour
  3. You’re looking to expand beyond contracting, either now or in the future
  4. Your contracts are likely to be outside IR35
You ought to consider setting up a limited company. Setting up a new business is a challenge. Yet, it’s one that has the potential to be very rewarding for both yourself and your family. To help you navigate the complexities of forming a limited company, here are some things to consider.

What are the benefits of setting up a Limited Company?

Incorporating your business into a limited company is a big step to take. And, while there are risks involved, there are also ample benefits. These include:
  • Financial Protection: Setting up a limited company can give you more financial protection. It creates greater distinction between your business and personal affairs. Separating your records, accounts, business and personal finances, can limit liability and help with things like tax returns. Moreover, if your company is sued or falls into financial strife, being a limited company will help secure your personal assets and credit rating.
  • Pensions and Funding: As your limited company is a separate legal entity to yourself, it can be a little easier to get funding. Plus, as a ‘company employee’, your pension can be a tax-deductible expense.
  • Succession Planning: It is far more straightforward to transfer the ownership of a business if you’re a shareholder. For instance, if you decide to retire, sell your business, or in the event of your passing, succession is easier than it would be for non-registered businesses.
It’s worth bearing in mind, though, that as a limited company director you may not be entitled to statutory payments. This includes things like holiday pay, sick pay and maternity pay.

Furthermore, you may well be subject to IR35.

This increased accountability means you’ll become responsible for the business’s insurance policies and administration. What’s more, you’re obliged to prepare and submit annual accounts to Companies House.

How will my role change?

By incorporating your business, you’ll become a director and shareholder of your own limited company. This will give you the autonomy, freedom and jurisdiction to make key decisions. For example, you decide when profits get distributed.

As your company’s finances will be independent from your own, your credit and personal assets are safe. Going limited is also a vehicle through which you can expand beyond contracting, if you wish to. Limited company owners receive ‘limited liability’ protection. This means they are only responsible for a business’s debts up to the value of their investments. Or, the amount they have guaranteed to the company.

However, limited company directors are subject to greater scrutiny over their actions. There are certain legal requirements that you must adhere to. Plus, you’ll be subject to higher levels of regulation and administration. For instance, if a director has a personal interest – financial or otherwise – in a proposed transaction with the company, he / she must declare it.

Likewise, directors are duty-bound to exercise independent judgement. They’re obliged to avoid conflicts of interest and to act within the company’s ‘articles of association’. To find out more about your directorial responsibilities, and the role of a limited company director more generally, click here.

What will my take home pay be if I operate through a Limited Company?

If you’re a ‘higher earning’ contractor, operating through a limited company could be the more financially viable option.

If you’re the director and/or shareholder of a limited company, you’ll pay yourself through a combination of salary and dividends. This will minimise the amount you pay in Income Tax and National Insurance Contributions (NICs).

A dividend is a portion of a company’s profit that goes to its shareholders.

For a more detailed indication of what you’re likely to take home check out Danbro’s contractor calculator. Our exclusive, calculator factors in your:
  • Pension
  • Contracted rate
  • Tax commitments
  • Payment cycle
  • Weekly hours
It will also give you an indication of your pay, regardless of whether your contract is inside or outside IR35.

Do I have to pay tax on shareholders’ dividends?

Any dividend income you receive from your limited company is NOT subject to NICs. What’s more, the first £2,000 per annum is tax-free.

Dividends above this threshold, which fall within the basic rate tax bracket, will get taxed at 7.5%. If they fall into the higher rate tax bracket, they’ll get taxed at 32.5%.

How to set up a Limited Company

It costs only £12 to register your company with Companies House. The fee is payable by debit card, credit card or PayPal account. To set up as a limited company, you will need:
  1. A company name and address.
  2. At least one director and one shareholder. The same person can be the owner and director of a limited company.
  3. A Standard Industrial Classification (SIC) Code. This is a four-digit code, which specifies the nature of your business.
You’ll also need three pieces of personal info about yourself and the guarantors or shareholders of your company. This can include:
  • Place of birth
  • Telephone number
  • National insurance number
  • Passport number
  • Mother’s maiden name
  • Father’s first name
You can register: Upon completion, you’ll receive a ‘certificate of incorporation’. This shows the company number, its formation date, and confirmation of its legal existence.

If you use the online service, registration for Corporation Tax is automatic. Alternatively, if you apply by post, you will need to register for Corporation Tax within the first three months of business.

Furthermore, you must register by post if you DO NOT want the word ‘limited’ to feature in your company name. For a full, systematic guide on setting up a limited company, click here.

If all this seems like too much hard work, don’t worry. When it comes to limited companies, Danbro have got you covered.

We are start-up specialists and experts in IR35. Our dedicated team will take care of your company’s registration, incorporating your business within 24 hours. We have an exclusive range of affordable service plans for business accountancy. All you have to do is decide which plan suits you and your company best.

Our set up costs are £95 (+ VAT). This includes the cost of incorporating your business, as well as VAT registration and assessment, as standard. We’ll make sure you’re registered for Corporation Tax and PAYE. Plus, as a thank you from the Danbro team, your first month of business accountancy will be FEE FREE.

If you wish to upgrade, we also have two other packages, offering savings on your combined accountancy and incorporation fees! So, get in touch today and launch your business with Danbro.

How to choose a Limited Company name

If you’re setting up a limited company, you will need to choose a business name. The name you select should not cause offense or contain sensitive words or expressions. Nor should it suggest a connection with local, central or international official authoritative bodies, unless you have the relevant permission.

Likewise, the name you choose for your business cannot be the same as an existing trademark (another registered company).

There’s more information available on how to choose a company name, here. Or, to find out if your preferred company name is already in use, take a look at this FREE tool.

How to choose a Limited Company address

It is a legal requirement for all UK limited companies to provide a ‘registered office address’. This is a company address where official communications are sent. This includes official correspondence from HMRC and Companies House. It is advisable to select a location that’s easy for you to access.

The company address should be publicly available and displayed on your website and comms. Note, though, that if your company’s registered with Companies House in ‘England and Wales’ you cannot have a registered office in Scotland, and vice versa. Your address can be:
  1. A home address.
  2. The address of your company’s accountant.
  3. A PO Box. Though, you must still include a physical address and postcode.


  4. Limited Companies and IR35

    IR35 is a tax law that targets disguised employment.

    A disguised employee is an individual who falsely positions himself or herself as a limited company contractor to pay less tax. HMRC consider this as tax avoidance.

    HMRC introduced IR35 back in 2000. The intention was to help determine whether contractors are working through their limited companies appropriately. Under the legislation, if certain conditions are met, the earnings of the PSC (Personal Service Company) are considered a ‘salary’ on which Income Tax and NICs are payable. This would mean you’re ‘inside‘ IR35. Where such criteria is not met, a contract is ‘outside‘ IR35.

    The three tests for employment status are:
    • Right of Substitution
    • Control
    • Mutuality of Obligation


    Here’s an example to show how it works in practice:
    1. A contractor provides services to an end client via their own PSC.

    2. The contract stipulates that the contractor should follow set processes. They’re also obliged to complete company training and provide the service themselves.

    3. The end client provides regular work. The contractor, meanwhile, gets a company email address and is even issued a company laptop to complete their assignments.
    4. In these circumstances, HMRC are likely to decide that the contractor is inside IR35.

      Will the IR35, Private Sector changes affect my Limited Company?

      Changes to IR35 in the private sector come into force on April 6th 2020. The new rules will transfer the responsibility for assessing the IR35 status of a contract from the contractor performing the work through their PSC, to their client. The changes intend to make sure that those who bill for their services via a limited company – while working in the same way as an employee – are paying the correct amount of employment tax.

      Under the new legislation, unless your end client is a ‘small business’, you’ll no longer have the responsibility for assessing the IR35 status of your contract. Instead, your end client will now determine that decision.

      If your contract is within IR35, then your contract income is subject to Income Tax and NICs. So, depending on your circumstances, your tax and NICs will get calculated and deducted by either your end client or recruitment agency.

      Those assessed as being inside IR35 will get taxed in the same way as an employee. Though, they may not receive the statutory benefits associated with permanent employment. This includes things like holiday and sick pay, as well as maternity and paternity pay.

      How can I prepare my Limited Company for the changes to IR35?

      • Behave more like a limited company and less like an employee.
      • Ensure you have in place an authorised, up-to-date, business-to-business contract.
      • Get ‘Confirmation of Arrangements’ signed by your end client.
      • Keep evidence of how you acted in a different way to your client’s employees.


      What options do I have if my contract is inside IR35?

      1. Continue to work through your limited company.

      2. Work with ‘small businesses’ through your limited company.

      3. Consider becoming an employee of your end client.

      4. Work with your end client to negotiate new working arrangements that are more in line with a B2B relationship. Therefore, the contract is more likely to be outside IR35.

      5. Close down your limited company.

      6. Make your company dormant.

      7. Switch to an employment umbrella company.
      For more information on IR35, and how to prepare for April’s changes, check out Danbro’s exclusive IR35 hub.

      What will happen to my Limited Company if I return to permanent employment?

      If you decide to become employed, either by another business or through an employment umbrella company, there are several options regarding what to do with your limited company. This includes dormancy or Members’ Voluntary Liquidation (MVL). Should you opt to close your company down, Danbro can assist you with the process for a small fee.

      16. Further Reading

      • Starting a business in 2020
      • Should I incorporate my business?
      • Getting paid if you’re self-employed


      How can Danbro help?

      If you set up a limited company, your focus should be on growing your business, rather than admin or payroll problems. You need a specialist accountant who’s attuned to your needs. Someone who plans ahead, keeps a close eye on your company’s cash flow, and helps you make informed decisions based on relevant, real-time data.

      At Danbro, you’re part of the family.

      WATCH: Meet Danbro Accounting’s Managing Director, Neil Ormesher: https://www.youtube.com/watch?v=6JBLvfT_L6Y&feature=emb_logo

      From a straightforward tax return to the outsourcing of an entire finance department, we can take care of everything. Leaving you more time to do what you do best.

      • We’ll Understand: We’ll assign you a dedicated personal accountant and start up specialist. They’ll oversee your affairs, gaining an intricate understanding of your business and how you work. Your personal accountant will provide professional advice and tailored support to your company. They’re there to ensure that you get the guidance and reassurance you deserve.


      • We’ll Deliver: Through our cloud-based software, you’ll be able to make important business and cash flow decisions for your new start-up. It’s high quality, real-time information available at the touch of a button.


      • We’ll Grow Together: We are business growth experts, passionate about helping start-ups like yours achieve their absolute potential. We promise to understand, deliver and grow together. But don’t take it from us, here’s what some of our longstanding clients have to say about Danbro.

        Launch your limited company with Danbro, today.

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