Contracting via a limited company can be straightforward, as long as contractors get the basics right from the outset. Clare Rickman of contractor accountants Intouch provides an overview of the limited company start-up process.
“The first step for any new contractors just starting their contracting career is to check with their accountant what trading vehicle, or payment structure, is most appropriate to their needs,” says Rickman. “If, for example, the contractor is not expecting to earn over £30,000 per year in fees, or their contract is inside IR35, then a limited company may not be right for them.”
Rickman routinely talks through a questionnaire with new contractors to help clarify the decision-making process. It reveals facts such as projected earnings and whether the contractor’s first contract is likely to be inside IR35.
Rickman also warns contractors against more exotic trading vehicles, such as offshore solutions: “Offshore trading solutions are for contractors with a certain kind of risk profile, and it’s unlikely that they would be the best option for a contractor’s first contract.”
Shares and shareholdings in contractor limited companies
Having concluded that a limited company is the correct trading vehicle, the next stage is to think about shares, shareholders and shareholdings. Rickman’s advice is always to keep it simple.
“For some married contractors it might be beneficial to allocate shares to a spouse if the spouse will be contributing time or capital to the business. However, it is not compulsory and there could be tax implications for the spouse when the first dividends are paid.”
Rickman also recommends that contractors keep the number of shares and their value to a minimum. “Under company law a contractor who plans to issue 10,000 £1 shares to themselves will have to deposit £10,000 in cash into the company bank account, which may come as a shock to many! A more modest 100 shares at £1 might be more appropriate, and the share allocation can always be increased if a contractor’s business grows significantly.”
Company paperwork and officers
Once it has been agreed who will own shares in the company, the contractor must decide who will be the directors and company secretary which, according to Rickman is much more straightforward than it used to be. There was a time when at least two people had to be appointed, a director and a company secretary.
“But a contractor limited company no longer has to have a company secretary and can now be incorporated with a single director,” she says. “Once again, it might be beneficial for a contractor with a spouse to appoint them as a director or company secretary and allocate shares to them, along with paying a salary to compensate them for the work they carry out for the company.”
A filing mistake made early on because a contractor decided to try and save a few pounds could prove costly at a later date, particularly if the company grows and the error has to be fixed
Clare Rickman, InTouch
Naturally, the contractor must choose a company name, and limited companies also require statutory paperwork to be filed, such as articles of association and a statement of capital. “Although it sounds complicated and time consuming, getting to this stage is often done with a single phone call,” adds Rickman.
Contractors will also need to decide on which address to use for the official registered address of their limited company that Companies House will keep on file. Many contractors choose to use their accountant’s address, but it can also be their home address.
Company incorporation and formation options
The internet is awash with one-hour online incorporation services, company formation agents and accountants all claiming low prices, and Rickman confirms that a contractor can choose to incorporate a contractor limited company online themselves.
“Contractors can incorporate their own company, but there is always a risk that they won’t do it right,” she warns. “A filing mistake made early on because a contractor decided to try and save a few pounds could prove costly at a later date, particularly if the company grows and the error has to be fixed.”
In order that the company can incorporate, the contractor needs to confirm the company name, its registered address, shareholders’ names and addresses and shareholdings, plus the directors’ full details, not forgetting date of birth and occupation. If a company secretary is part of the setup, their details must also be confirmed.
“This sounds like a lot of work, but can be quickly and accurately achieved by an experienced accountant,” says Rickman. “And once the company has been incorporated, with a company number and certificate, the contractor is ready to start registering with HMRC, opening a bank account and starting to trade.”