When working as a contractor it’s a great idea to consider private limited company advantages and disadvantages.
There are currently more than 2.7 million limited companies in the UK according to data from Inform Direct online company records.
Below is a detailed look at some of the main pros and cons:
It is relatively easy to register a private limited company in the UK. In fact, you can fill and submit all the relevant paperwork online.
This means you can have a legal business up and running in a matter of hours.
It is probably worth noting that it used to take weeks to complete the same process before the UK’s Companies House rolled out online paperwork filling and submission to hasten the process.
Private limited companies are attractive to entrepreneurs because they generally attract generous tax relief benefits.
To start with, you can offset the cost of setting up a limited company by filling an allowable expense against corporation tax. This means that even an entrepreneur bootstrapping his/her startup can afford to set up a legal business entity without straining financially.
In addition, private limited companies are only subject to profit tax at a rate of 20%.
In comparison, sole traders or partnerships are subject to personal tax rates that can be as high as 40%.
Another tax benefit savvy limited company directors enjoy is salary paid in the form of dividends to avoid earnings tax that ranges anywhere from 20% to 40%.
This is because earnings below £6,475 are not taxable.
To make the most of this incentive, you should exercise this tax-free earnings minimum and then use dividends to cover additional earnings. Such an approach makes financial sense because dividends are taxable at a rate of only 10% (better than 20 to 40%).
A private limited company has its own legal identity that is separate from that of its owner/s. This allows a limited company to continue operating even after the death of its founder/s. In addition, its directors can change over time.
The only way a limited company can cease existing is if it undergoes formal winding up or liquidation processes instituted by its owners, creditors, or the Registrar of Companies via a court order.
A private limited company can easily raise capital from investors compared to a sole trader or a partnership.
Although a private limited company cannot offer its shares to the public, it can offer shares to investors who are willing to put up cash needed for purposes like expansion or acquisition of competitors.
The good news is directors of a private limited company are usually the main shareholders giving them huge leeway in decision-making. For instance, they can create a class of shares that have pre-emption rights to prevent investors riding roughshod over them.
The liability of transactions, agreements, and contracts involving a limited company do not extend to its directors or shareholders. Such an arrangement means that directors and shareholders can only be liable for debts accrued by a limited company up to the level of their individual investments.
Appending the term “limited company” to your business’s name gives it an aura of credibility, stability, and permanence making it easier to enter into transactions with third parties.
It is worth noting that no one else can use a legally registered private limited company name. Companies House even frowns upon registering a business name that is similar to that of an existing company.
For entrepreneurs, such legal protection has made it possible to build unique brands that consumers can easily identify.
Private limited companies have restrictive and complex bookkeeping rules that can confound novice entrepreneurs.
Furthermore, preparing a year’s worth of financial accounts and complying with acceptable bookkeeping standards (double entry format) can be tedious.
For entrepreneurs who do not want to go through all this hassle, the alternative is to hire a professional accountant or purchase costly bookkeeping tools (software). These administrative burdens can wear down budding entrepreneurs.
Members of the public can access the published financial records of a limited company. The same is true for names and details of company directors and shareholders although this is to a limited extent.
Nevertheless, increased scrutiny can make it hard for one to access financing from investors if past financial records show inappropriate expenditure, losses, or questionable financial transactions.
In addition, failure to adhere to fiduciary and personal responsibilities laid out in a company’s statutory documents could lead to criminal charges.
There are other options to a private limited company with one of the top ones being an umbrella company.
An umbrella company functions as an employer of agency contractors.
The main aim of this type of company is to facilitate payment of contractors for services rendered.
Umbrellas are attractive because they give one the freedom of working as a contractor and enjoying PAYE eligibility.
This is in addition to the flexibility of determining one’s own working conditions without worrying about back office operations such as handling paperwork. However, some umbrella companies have high tax and NIC liabilities.
In spite of this, using an umbrella company is very easy.
All you have to do is sign up with an outfit that offers umbrella company services and then use a timesheet or appropriate documents to log time spent at work.
Umbrella firms use timesheet details to prepare invoices, which they forward to clients.
After clients settle submitted invoice, umbrella companies forward payment to relevant contractors minus pre-agreed fees as well as tax and NI deductions.
Contractors also get detailed pay slips that contain information such as the amount of money earned and formula used to calculate salary.
A private limited company has many advantages including limited liability, ease of raising capital, ease of setting up, separate legal identity, tax relief, and credibility when seeking new business or entering into transactions.
Drawbacks include bookkeeping complexities and privacy issues.
For contractors, umbrella companies offer fare more flexibility in terms of setting work conditions and schedules, receiving payments, and handling paperwork. In effect they perform all your admin saving you accountancy fees and helping advise you on the best ways to pay tax and NI.