What is a limited company?

We explain what the upsides and what the downsides are of working through a Limited company.

The vast majority of contractors and freelancers work through their own Limited Company.  The quickest and easiest way to set up a limited company is to go to an accountant or company formation bureau and buy an “off the shelf” company, which will cost you between £100 and £150, although some accountants will set one up for you for free. 

A limited company must have at least one director and a registered office and must have Limited or Ltd after its name.  A limited company is a distinct legal entity in its own right.  You are not the same as the “company”; the law sees the limited company as a separate “person”.  It has rights and responsibilities and can own property or equipment.  The company may have a business account with a supplier, can have its own bank accounts and can hold shares in other companies.

Don't forget to look at PCG Startup if you want to set up a company or PCG Standard and PCG Plus memberships, designed for Limited companies.

The upside

• Your company is a separate legal entity, which makes it liable only for debts it incurs.  Your personal assets, such as your home, are protected.
• It can help credibility with clients and suppliers and financiers.
• If you land work via agencies, they don’t have to deduct tax at source.  Instead they can pay you gross, which is more tax efficient.
• Business expenses and losses can be off-set against tax.
• You can control how you combine salary and dividends to pay yourself.  In many cases a limited company can be the most tax efficient route available.

The downside

• You have legal responsibilities as the director of a company.
• There is more admin and a marginally higher cost in running the company due to obligations such as submitting company accounts.
• You can still be ‘deemed employed’ if your relationship with your client resembles employer/employee, but your company will suffer the financial consequences by having to pay employed levels of tax and NIC on any fees paid by your client to your company.  This is known as being IR35 caught, and HMRC can seek to recover tax going back several years.

Arriving at a verdict

How long are you intending to freelance or contract for?  If it’s just a few months, it’s not worth setting up a limited company, but if you intend to work for yourself for the foreseeable, go for it!

Find out how much your accountant would charge to handle the admin and company accounts for your limited company.  Some charge surprisingly little for a quality service (PCG’s website lists a number of PCG accredited accountants if you don’t have one).  You may find the marginally higher costs and admin of running a limited company are outweighed by the advantages, such as limited liability and tax efficiency.

Make sure you understand the issue of employment status and how to avoid being IR35 caught by using proper contracts and working practices (again, your PCG membership will supply you with contracts and advice).  As long as you can set up proper business to business relationships with your clients, you should have no problems with IR35, and no reason not to set up a limited company.

See our guide to freelancing for more advice on running a business >>

PCG Startup

If you choose to set up a limited company then PCG can make it easy for you with PCG Startup.  Click here for information on PCG Startup membership >>

PCG Standard and PCGPlus

If you already have a limited company and wish to keep it, there are two PCG membership options available, PCG Standard and PCGPlus. 

PCGPlus gives you additional protection and resources such as PAYE Audit cover, Jury Service cover, Agency bankruptcy/default cover and access to Ashridge’s renowned Virtual Learning Resource Centre. 

Click here for information on PCG Standard membership >>

Click here for information on PCGPlus membership >>