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IT contractors - What is a limited company?

Published on Feb 23, 2009 |

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Most IT contractors work via a limited liability company. So what is a limited company, what are your responsibilities as company director, and how does Companies House fit into the formation process?

How does a Limited Company work?

- If you are a director of a limited liability company, your financial risk is limited and you will have no personal 'liability' if the company fails.

- If you operate via a limited company, the company invoices the agency or client. It is a distinct business structure, separate from you, as an individual.

- In other business structures, such as the 'sole trader' route, your personal financial liability is indistinct from your business financial liability. Very few contractors are sole traders.

- Your limited company will require its own business bank account.

- All limited companies are registered at Companies House. You will have a unique 'Company Number' once your company is incorporated.

- As a limited company director, you will be responsible for the running of the company, and fulfilling a number of financial and administrative tasks each year.

- Although your contractor accountant should take care of your accounts and Companies House paperwork, you will be ultimately responsible for the administration of your company should anything go wrong.

- Limited companies, like all UK companies, are subject to corporation tax.

- Typically, contractors' limited companies will pay the 21% 'small companies tax rate' on their profits.

- Limited companies must submit their annual accounts to Companies House, and an 'Annual Return' (basic company information) each year. Penalties apply for paperwork delivered late.

- You can set up your own limited company direct via
Companies House, via a company formation agent, or your accountant will typically be more than happy to carry this out for you.

- Although Companies House only charges a £20 fee for
incorporating a company, many contractors will pay a bit more for the additional help and advice an intermediary can provide (e.g. a formations agent or accountant).

- If your contract work falls outside the 'IR35' tax rules, you will usually be better off working via your own limited company rather than an umbrella company.

- From April 2008, limited companies no longer need to have a company secretary. You can run your limited company as its sole director if you wish.

- You can set up a limited company right away via our long-term formations partner, Duport.

- If you are unsure which company structure is best for you, try our guide - IT contractors - limited or umbrella company?