How to set up a limited company as a contractor

The limited company business structure is frequently used by professional contractors and many other small businesses.

As the term would suggest, the financial liability of limited company directors is limited – their personal finances are separate from those of the company (unlike the sole trader business structure).

For a number of reasons, it is very unusual for contractors to set up as sole traders.

Although the shareholders in limited liability companies are not responsible for company debts, on occasion, directors may be required to guarantee loans or credit granted to the company.

Legal requirements of limited companies

These are the high-level legal requirements of all limited companies:

• All limited companies in the UK must be registered with the registrar of companies, Companies House.
• The directors must submit the company’s Annual Accounts to Companies House.
• The directors are responsible for submitting the company Confirmation Statement to Companies House. This provides a ‘snapshot’ of the company’s details at a moment in time. You must submit this form within 28 days of your ‘made up date’ (£13), which is typically the date of incorporation. It can be updated at any time throughout the year – with no extra charge.
• Each company must file a Corporation Tax return (CT600) each year, and pay any due liabilities within 9 months and 1 day of the year end.
• The company must deduct income tax and National Insurance Contributions from all employees on behalf of HMRC, via the Pay As You Earn (PAYE) scheme.
• Anyone employed by the company must pay income tax and national insurance on their income.
• Companies are no longer obliged to appoint a company secretary following the implementation of the Companies Act 2006. A company can be run by a sole director if necessary.

Information required to incorporate a limited company

To successfully incorporate a limited company in the UK, you must submit three documents to Companies House.

1. Form IN01

This is the formal application form, which includes your registered office address, details of all company officers (directors/company secretary if needed), details of share capital and classes of shares issued.

Before you fill in this form, you must first check that your desired company name is available and that it doesn’t fall foul of the rules governing ‘sensitive’ words or expressions. Read more about naming your company.

2. Articles of Association

A document which acts as the ‘constitution’ for the company. It sets out how the company is to be run. On 1st October 2009, new ‘model’ articles were introduced as part of the Companies Act 2006 roll out. These model articles are used as standard unless you elect to provide your own Articles.

3. Memorandum of Association

This contains a statement by each subscriber confirming their intention to form (and become a member) of the company in question. When you incorporate online, the Memorandum is automatically created using the information you submit about the company’s initial shareholders.

Read more in our guide to the Articles and Memorandum of Association.

Different ways to incorporate your company

Although you can form a company directly via Companies House, many contractors prefer to incorporate via a company formation agent, or an accountant.

If you incorporate direct via the Companies House Web Incorporation Service, you can submit all the required information online, without the need for any forms, for a mere £12.

An intermediary is likely to charge more (for obvious reasons), or they will offer you a company for a very competitive price, and make their money from add-ons, such as bank account services.

Our partner formations agent, 1st Formations, will set up your company from £12.99 – they do all the hard work for you.

Most contractor accountants will happily set up a company on your behalf (sometimes at no extra cost if you sign up to use their services). This is a popular option for contractors, as there are a number of other administrative tax-related tasks to attend to as a new company owner. These tasks can be undertaken at the same time if your accountant also forms your company.

Read our popular guide to choosing the best accountant.

What happens next? Next steps

Once your company has been successfully incorporated, you will be sent a Certificate of Incorporation, which you should keep in a safe place.

These are the typical steps you will need to take as a new limited company director. Don’t forget, if you appoint an accountant, they will deal with all of the tax and administrative tasks on your behalf.

• Set up a business bank account – a limited company is a distinct legal entity, so you need a separate account.
• Authorise your agent – this lets HMRC know that you’ve appointed an accountant to look after your affairs.
• Register for VAT – most contractors register for VAT, even if they don’t meet the £85,000 registration threshold.
• Register for Corporation Tax – the tax on company profits. Find out more in our guide to Corporation Tax.
• Register as an ’employer’ – this will enable you to run a company payroll, deduct PAYE and NICs from all employees.
• Decide on your salary/dividend split – How will you pay yourself? Read more in our popular guide to salary vs. dividends.
• Are you insured? – you may want to take out business insurance (e.g. professional indemnity cover).

Form a limited company today from £12.99

You may decide to use a formations agent to set up the company on your behalf. 1st Formations offers a variety of company formation packages – from £10.95.