If you’re a contractor or freelancer, and you’re thinking of setting up as a limited company, then it’s worth knowing ‘what is a limited company’ in the first place.
Here you’ll find the answer to that question, along with a bit more background to explain the pros and cons.
What does a limited company mean?
A limited company is an organisation that you can set up to run your business. While the ‘company’ takes full responsibility for everything your business does, its finances are entirely separate from yours.
Any profits are owned by the company, then divided out among the shareholders.
There are several things that all limited companies, of any size, will have in common.
All UK companies are Registered at Companies House
So your name and company address would be open for anyone to see.
All limited companies are owned by the shareholders
There might be lots of shareholders, or just one.
All limited companies are run by the directors
If you’re setting up your own limited company, then you will be both a director and a shareholder.
Liability for limited companies is limited
Yes, the clue is in the name. Because they are their own legal entity, if the business has debts then the shareholders and directors are not expected to pay them.
What benefits does working as a limited company have?
If you’re used to freelancing or contracting, then all of this might sound a bit complicated and therefore not that relevant. In truth, it is highly relevant. A limited company separates your personal finances from the finances of your business, so as well as limiting your liability, you can manage your money in different ways. Including paying yourself a combination of salary and dividends, making you more tax efficient.
Working as a limited company would have the following benefits:
- Give you a higher income – you’ll take home more money, especially if you earn more than £50,000 per year, because having a limited company is more tax efficient than other solutions such as umbrella
- Lower your risk – you’ll also help protect yourself from losses if things go wrong
- Greater flexibility – you can decide when you work, allowing for an improved WorkStyle
- Boost your credibility – it could help the appearance of your business to clients (and be the perfect excuse to splash out on new business cards!)
What are the drawbacks of a limited company?
The drawbacks are that you have the added costs and complexity of running a ‘proper’ business. Each financial year, your company needs to do quite a bit more admin, and as a director you still need to fill in a Self-Assessment tax return and ensure you pay the correct amount of tax and National Insurance. You also need to adhere to IR35 guidelines, to prove you’re not a disguised employee.
But the costs are only likely to be a fraction of what you’ll make up in tax efficiency. And if you’ve got ClearSky with you all the way, setting up and managing all that paperwork is done for you.
How can ClearSky Contractor Accounting help?
Hopefully you can now answer the question "What is a limited company?" And maybe even the question "Should I set up a limited company?" The secret to successfully going limited is the right support, so if you’d like to chat more about how ClearSky can help you do this then give us a call on 0800 032 5326 or email email@example.com.