Setting up a limited company - Pros & Cons

• Dave Chaplin (Contractor Calculator)
• Friday 3 December 2010

There are advantages and disadvantages to running UK companies. It is your personal circumstances, your career plans and aspirations and the nature of your contract that will determine the right trading option for you.

You may also find that the decision is taken out of your hands, and that your agency or client insists that you set up a limited company before they will even do business with you.

UK limited company advantages

Company formation is incredibly fast and inexpensive. You can register a limited company with Companies House, the UK agency which regulates every ltd company in England and Wales, in a matter of hours and for as little as a few tens of pounds if using an online service.

As a contractor you can benefit from significant tax advantages by trading through a ltd business. Most contractors pay themselves a minimum salary and take the company profits as dividends, which can result in much higher take-home pay compared to being paid a salary from other trading options.

You can claim legitimate business expenses from your own ltd company, such as the costs of running a home office with all the computers, software and equipment that requires, plus travel expenses, subsistence and even training costs.

And, as its name suggests, a limited liability company can protect your personal assets, such as your home, if the worst happened and a client decided to sue your company.

Disadvantages of a limited liability company

Even though your company is a separate legal entity from you personally, you still have duties, obligations and responsibilities as a shareholder and director. This would not apply were you to contract via an alternative trading option.

After you register a limited company, you must send annual accounts prepared by your accountant, annual returns and notifications of any changes to shareholdings and company officers, such as directors and company secretaries, to Companies House

Your UK limited company must also file a corporate tax return with HM Revenue and Customs, the UK's tax collection agency; failure to do so can result in fines and even criminal prosecution.

Evaluate the pros and cons before deciding

Setting up a limited company can bring you many benefits, such as increased take-home pay, the ability to claim business expenses and protection from clients looking for a scapegoat.

But some contractors feel the burden of paperwork, such as corporate tax returns, and the responsibility of running a company are too great and choose alternative options for contracting.

Consider the pros and cons and consult a professional, such as a contractor accountant, before making your final decision about whether registering a limited company is right for you.

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