You may have started contracting through an umbrella company and now want to continue your contracting career through your own limited company.
Why move from umbrella to limited?
The potential reasons why you would wish to move from an umbrella company arrangement to that of having
your own limited company are as follows:
- When you started life as a contractor, you were not sure if it would be a long term prospect, so decided to go for an umbrella company as a short term option. You have now decided that you like being a contractor, and having your own limited company seems a more appropriate solution for the future
- You wish to have a degree of control over your company affairs, to enable you to be more directly involved in expanding and developing your own limited company
- You are unhappy with the service of your existing umbrella company and feel you may avoid some of the problems if you take control yourself
- You are sensitive to umbrella company costs (they are usually more expensive than running your own limited company, since they do more work and take more responsibility). This is analogous to the difference between owning and renting a car
Practicalities of Moving
Moving from an umbrella company to a limited company should be fairly painless, as long as you follow some simple steps. Firstly, you will need to examine the existing contractual arrangements you have committed to with your existing umbrella company and your agency.
It will be difficult to transfer an existing running contract from an umbrella company to a new limited company, unless you have the co-operation of the umbrella company and the client and/or agency concerned. Difficult, but not impossible.
Often it is the client who is the most awkward, as they have to sign a new contract which may involve a long-winded process with their HR or procurement teams. Some umbrella companies have a tie-in period with penalties or additional costs if you leave early – make sure you check your contract first.
There may be a ‘closing down’ process or dissolution procedure for leaving an umbrella company which is effectively giving notice as you would to any employer. You should ensure that the umbrella company pays you fully for all amounts owed and any retentions for holiday pay or contingencies, which they may have held back during the period of the contract.
you then have to go through the process of choosing an accountant for your limited company and then set up the limited company.
The basics of going limited
Creating and running a limited company may seem like a daunting task for new contractors, but as long as the process is understood, you are organised and you use the right professional advice at the right time, it does not have to be onerous or costly. In fact, setting up and running your limited company can be remarkably quick, inexpensive and easy.
The steps required are:
- Choose an accountant
- Register your company
- Get a business bank account
- Configure your online accounting for record keeping
- Get insurance
To run the company you will need to:
- Consider IR35 issues
- Update your records
- Invoice your clients
- Chase payments
- Plan salary and dividends
- Do tax returns - company and personal
- Deal with VAT
- Process expenses
- Prepare annual accounts
The vast majority of this can be done for you by your accountant, and with most accountants you can choose how much you wish to outsource to them, and how much you wish to do yourself. After one year, a full accounting cycle will be completed, and you'll see that it is not as onerous as you might have first thought.