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Starting Out :: 4. Limited Company or Umbrella?  

There are several ways to set up as an IT Contractor of Freelancer - the majority of contractors tend to go down the Limited Company route, although others may prefer to work via an "Umbrella Company" or similar structure.

The term 'limited' derives from the fact that the company's finances are distinct from the personal finances of their owners (unlike the sole trader arrangement).

Shareholders in limited liability companies are not responsible for company debts, although if required, directors may be required to guarantee loans or credit granted to the company.

You can either set up a limited company online (instantly) via our partner here, or you may prefer to hire a contractor specialist accountant to do this for you.

Click here for our Setting Up a Limited Company guide.

The other option is to contract via an 'umbrella company'. These companies are aimed at contractors who would rather work without the administrative duties associated with running their own limited company. Typically, you would pay the umbrella company a monthly or weekly fee, and they would deduct all your National Insurance and PAYE liabilities automatically, paying you a net salary or wage.

Click here for our IT Contractor Umbrella Company guide.

Your choice of whether to contract via a Limited Company or other structure will also depend on a notorious piece of legislation known as "IR35". IR35 was introduced as a tax avoidance measure aimed at people who would set up a limited company purely to pay less tax, while performing the same duties as a permanent employee. Fortunately, there are a wealth of IR35-related online resources which will help ensure you do not fall under this legislation. You can also read our background to IR35.

Before setting up a legal structure for your contracting business, you should always seek the advice of an accountant who can guide you through the pro's and con's of contracting via an umbrella company, or your own limited company. They should also be able to provide guidance on your liabilities under the IR35 rules.


Published on Feb 13, 2006


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