Operating through your own limited company is usually the best option if you’re planning to work as a contractor. Aside from being the most tax-efficient business structure, it also provides limited liability protection and gives you complete control of your business and finances. These are the main reasons why so many contractors choose to form a company.
Setting up a limited company is relatively straightforward. The process is exactly the same for contractors as it is for every other type of commercial business owner – you need to complete a company formation application and file it at Companies House. Below, we outline the 5 simple steps required to form a company as a contractor.
Step 1: Decide on a company name
You can call your new company whatever you like, within reason. Whether you want to use your existing business or trading name or something entirely different, you just need to ensure that it follows the company name rules set out in UK legislation.
However, on account of IR35 legislation, contractors are generally advised to avoid naming a company after themselves. Rightly or wrongly, HMRC often suspects contractor companies registered with the name of a person are actually disguised employees attempting to avoid tax.
If you give your company a more professional, ‘business-like’ name, it goes towards showing that you’re operating as a genuine freelance contractor through a distinct entity. This alone is not enough to ensure that you fall outside of IR35 legislation, but it is nevertheless important to minimise the risk of undue suspicion from HMRC.
Step 2: Choose a registered office address
Every limited company requires a registered office address in the country where it’s incorporated. This will be your company’s official HQ address, so you must provide one when you apply to form a company. It will be recorded at Companies House and listed on the public register.
If you already have business premises or designated office space, you can use that as your registered office. If you do not, you should purchase a professional registered office service instead, or use your accountant’s address.
It’s best to avoid using your residential address. Aside from the obvious issues around personal privacy, a home address looks less professional and credible than a commercial one.
Step 3: Choose your company director(s) and shareholder(s)
Most contractors only appoint themselves as directors and shareholders of their own companies. However, if you are planning to go into businesses with other people, issue shares to your spouse/partner or children, or sell shares to raise capital, a limited company structure gives you the option to appoint additional directors and shareholders.
As a director, you will be responsible for running the company, making all of the day-to-day decisions, and ensuring that the business meets its statutory obligations. This includes filing confirmation statements, preparing accounts and tax returns, and paying tax.
As a shareholder, you will own the company by purchasing one or more issued shares. Owning shares entitles you to dividends, and you will have ultimate control and decision-making powers over the business.
Step 4: Decide how many shares to issue
You will have to issue a minimum of one share for every shareholder in the company. If you’re going to be the only shareholder, it’s pretty simple – you just need to issue one share to yourself.
However, if you’re planning to form a company with other people, you must discuss and decide between yourselves how many shares you each want to take. This will determine what percentage of the business each person owns and controls – and how much profit each shareholder is entitled to receive as dividends.
Step 5: Form a company online
The final step is to complete a company formation application and send it to Companies House. The easiest way to do this is to go through a company formation agent like 1st Formations. We have a range of services to suit every need, with limited by shares packages from just £12.99.
The online application form takes about 5 minutes to fill out. It’s then electronically filed at Companies House and (all being well) approved within 3 to 6 business hours. You’ll receive digital copies of your company formation documents by email and you can start trading as a contractor through your new limited company whenever you like.