Setting Up A Limited Company (Ltd) What Does It Mean?

By John T Hughes

Tired of being bamboozled by the term 'limited company'? As a freelancer or contractor, it is important to know the difference between working for an umbrella company or choosing to start up a Ltd company. Contractors, sole traders and limited companies are all different business mediums in which people chose to earn an income through. Choosing the best medium for you is a big decision and should be done through an independent advisor or a specialist contractor accountant.

Limited Company: Back To Basics

• A limited company is often shortened to the abbreviation Ltd, and usually appears after the company's name.
• Setting up a Ltd means that the business is owned by its shareholders, or that individual shareholders own a small portion of the business.
• A Ltd is known as having 'limited liability' structures in place. This is its first advantage. It means that if the company should fail, the shareholders of the company are not liable for its debts.
• Operating under a Ltd means investors or shareholders in the company can only lose the money they have invested and no more.
• Trading under a Ltd means that your personal and business finances are kept separate. This requires you to set up a bank account underneath the Ltd company's name. As a contractor or freelancer, the shareholder is normally simply the individual freelancer. You can however split the ownership between different people including family members.

When is starting a Ltd company a good idea?

Setting up a limited company or choosing to work through an umbrella company is in one of the options you need to consider once you've made the leap to become self employed. It may make the difference between becoming a successful contractor with a steady income, or your business floundering. It is always best to talk in person to a specialist contractor accountant as they can assess your individual circumstances and needs. Below are a few rough guidelines on whether an umbrella company or setting up your own Ltd company is the best option for you.

• If you are an established contractor, already contracting for at least 6 months, or planning to contract for the long-term or indefinitely, then starting up a Ltd company may be for you. You will already have a rough idea of the way in which freelancing works in regard to paying tax, NICs and claiming expenses.
• If you are new to freelancing or contracting than it is best to work under an umbrella company until you find your feet.
• Ltds are more suitable for higher earning contractors on higher rates of pay. If your earnings start reaching or tipping over a £40,000 per annum threshold (equivalent to £150+ a day) then setting up your own Ltd is more beneficial.
• Individuals starting Ltds will have a genuine interest in setting up their own business. A Ltd corporate structure looks more professional to customers and clients but a contractor should be aware of the added responsibility it entails.
• Setting up a Ltd is a sign of independence but in turn requires slightly more administration. Completing annual returns, personal and company tax returns, making payments and signing various documents all will have to be done. Also calculating your own expenses with receipts and bank statements will require the Ltd contractor to be more confident with their administration.
• Ltds must negotiate the minefield of IR35s, a piece of legislation introduced by HMRC. Does the IR35 apply to your Ltd company? There are helpful companies out there who can offer contractors a limited company service such as a specialist contractor accountant to deal with difficult HMRC paperwork.
• As discussed before, the limited company is your sole responsibility and you will need to arrange business insurances directly.

It is important to reiterate, filling out tax returns and completing other administrative paperwork can be a cumbersome task. If you are ready to progress to the next step in your career by becoming a Limited Company (Ltd) it can be a richly rewarding experience. If however the process seems too daunting then employing the services of a specialist contractor accountant is the best way of securing that all HMRC paperwork is filled out correctly and on time; avoiding big penalties from the tax man. A specialist contractor accountant can help you by either setting up a limited company or by managing an existing one for you.

For the self-employed, tax can be a headache. Forming a limited company can be an efficient way to manage tax affairs, but ensuring you get the right structure for your business is essential.

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