When you start out as a contractor you will effectively be starting your own business, and like every other business you will need to register that business with some part of the government to let them know what you are doing. This will mean contacting either HMRC or Companies House either before or after you start trading. However it is actually to your advantage to get everything registered and set up before you start as it allows you to have all your documents and files in order from the start and to keep up to date and well-organised books from the beginning.
Most people starting out in a business will face the decision whether to register as a Sole Trader or a Limited Company. For contractors, the choice is typically slightly different and will come down to choosing between joining an Umbrella Company or Limited Company. As has been covered elsewhere on this site there are all kinds of benefits to running your contracting business through an Umbrella Company. From statutory rights and benefits (such as sick leave, holiday pay and maternity pay) to freedom from paperwork and admin, accounts and invoices. All of these are part and parcel of running (and registering) a Limited Company, and there can be little doubt that Umbrella Companies free contractors from most of these hassles. There are, however, similar advantages to contracting as a Limited Company, which is why most contractors still do so.
What's Covered on this Page
The Advantages of Limited Companies
Most people go Limited because it means that their company becomes a separate legal entity to themselves. In other words, they get to limit how much they would be liable if there were ever a time that the business got into financial trouble and owed significant debts. They would not be affected. It also offers great advantages when it comes to tax efficiency in that the company makes the profits, and you can pay yourself both as an employee and/or a shareholder taking dividends. And for contractors who consistently earn more than £300 per day (as well as long term contractors) Limited Companies definitely are worth the extra paperwork.
Registering Your Company
If you do decide to go ahead and start a Limited Company, there are a number of different ways you can do it. The main route that is both cheap and easy is to go directly to the Companies House website and register it yourself for about £20. This means that you will have to fill out all the forms yourself which does take some time and which needs to be done carefully, but it is still relatively easy to do. Otherwise, you can pay any one of a number of companies to handle the process for you and they will fill out all the forms on your behalf for a slightly higher fee than the normal Companies House charge. At least with them doing it you know they will do it correctly (provided you pick a reputable company). Finally, you can also get your accountant to do it for you if you don’t feel confident enough to do it yourself, you want to get someone you know to do it. Though it is likely, they will charge you significantly more than £20!
Your Company and Its Officers
When it comes to setting up a Limited Company, the law requires that the company has a minimum of one company director. That company director’s name and address must be clearly written in the Articles of Association of the company. They must be a ‘natural person’ (as opposed to being another company) and over sixteen years of age. If you register online, you will need to create a digital signature for each and every director containing three pieces of personal information. Private limited companies are not required by law to have a company secretary but can appoint one if they want to.
Every limited company is owned by shareholders and it is divided up into shares. Share capital represents the nominal value and number of shares. You can set this figure as anything you want, and you do not have to issues all of those shares. As an example, you could set a share capital of 1000 with each valued at £1 and you could then divide that among shareholders (depending on their holding). Or you could just issue one share for yourself and keep 999 to be issued later.
Your Company Documents
When registering your company with Companies House, you are going to have to fill in four different forms. These are
- a Memorandum of Association – this details the company name, the purpose of the company and the company location
- the Articles of Association that describe how the company will be run
- the Statement of First Directors, Secretary and Registered Office which records where the company has its registered offices and the addresses of the directors and
- the Declaration of Compliance with the Requirements of the Companies Act.