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.
How to incorporate a limited company
In order to form a limited company in the UK, you must submit three documents to Companies House.
1. Form IN01 – all the details related to your company, its officers, and shareholders.
2. Articles of Association – this outlines how the company is going to be run in practice. Model (standard) articles are used by most limited companies and are available from Companies House.
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.
You can read more about the Articles and Memorandum of Association here.
Although you can form a company directly via Companies House, many contractors prefer to incorporate via a company formation agent, or their 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.
Alongside the online formations service, the Companies House site contains detailed information on how to form a company, and your obligations as a company director.
The next step
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). There are other administrative tasks involved in setting you up as a limited company contractor, such as registering your company for VAT, Corporation Tax and as an ’employer’, so some accountants will charge a one-off set-up fee.
Try our select list of contractor accountants as a useful starting point.