Contracting is one of the most exciting career options available, however there are a number of advantages and disadvantages of working through a limited company.
Becoming your own boss gives you the ability to choose your way of working, as well as unlocking various other benefits such as tax planning and increased take home pay. However, there are a few points that you must consider before making the leap. As a limited company director you will have a range of new responsibilities, such as filing your company’s paperwork.
In this guide, we take a look at the advantages and disadvantages of working through a limited company.
Advantages of a limited company
1. Higher take-home pay
Working through your own limited company is the most tax-efficient option. Provided you are outside IR35, your take home pay will be higher than choosing to work through an umbrella company.
2. Claim on limited company expenses
Anything that is solely classed as a business cost can be claimed back on expenses. Trading through a Limited company means you can claim on a wider range of expenses such as accountancy fees, equipment, software, phones, travel, Internet and much more. Read our Contractors Guide to Expenses for more information.
3. The Flat Rate VAT scheme for contractors
The Flat Rate VAT scheme can generate thousands of pounds of extra profit a year, with most contractors choosing to apply for this VAT scheme. Visit our page to read more about the Flat Rate VAT Scheme.
4. Personal assets are protected
As a non-limited business, personal assets can be at risk if the business fails, but this is not the case for a limited company. As the shareholder you cannot be held personally liable for the debts of a limited company, meaning your personal assets are not at risk.
5. Ease of use
Running your own business isn’t difficult; your personal accountant will help manage your finances. Working through your own limited company does require a certain level of commitment but typically most contractors tell us they spend around 15 – 20 minutes per month managing their company.
6. Company given more credibility
Operating as a limited company often gives suppliers and customers a sense of confidence in a business and quite often other companies prefer not to deal with non-limited businesses.
7. Complete control of your business
You keep complete control of your financial affairs meaning you do not have to risk your money with any third party administrator or umbrella company.
8. Greater opportunity for tax planning
It goes without saying that working through your own limited company is more financially rewarding, which is only fair bearing in mind the extra responsibilities and loss of full-time employment benefits.
9. Protection of your company name – even if you are not contracting
Once your proposed company name is registered as a limited company, the name is protected by law and no one else is allowed to use it. Waiting to register your company could mean you lose the name you had initially wished to trade under.
All you need to run a successful business
Our free limited company guide will explain all the intricacies of contracting through a limited company.
Disadvantages of a limited company
1. A certain amount of paperwork involved
As mentioned above, there are about 15-20 minutes of administration work required per month, not much more than that of an umbrella company.
2. Accounts need to be filed every year
You have to file your accounts at Companies House each year, which will be on public record. You will also have to file accounts, company tax and Corporation Tax calculations with HMRC every year, but your dedicated accountant will help with all these aspects.
3. Costly if contracting for a short period of time
Running a limited company can be costly if you have a short-term contract then decide to go back to permanent employment as you will still be required to submit end of year accounts. Short term contracts are considered to be anything less than a couple of months - but it does depend on your daily contract amount.
4. Not ideal for contracts less than £25,000 per year
This is only a general rule, and in some circumstances (depending on the contract) it may still be more beneficial trading through a limited company. We would recommend contacting an accountant and asking them for their advice.
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When you sign up for one of our accountancy packages, we will set your limited company up for free. With packages starting at just £120 + VAT, we will form your company and have you up to speed in no time at all.
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