Setting up a Limited Company for Contracting in the UK

Limited companies are commonly popular in the UK because of the tax benefits you could get and the liability is limited. As the term suggests, a liability company’s member is limited should things go wrong, and the company itself is a completely separate legal entity from its directors and shareholders.

This article will walk you through the things to consider before setting up a limited company, how to set up an LLC for contracting, and how much it would cost.

We’ll also show you how to save time and money using Wise Business - a modernized solution to your accounts payable and other financial transactions. With Wise Business multi-currency account you can also earn a return on the money you hold.

Things to consider before setting up an LLC

Once you have decided to venture in a limited company, you should consider some things before you take the leap.

1. Funding – whether you’re a small business owner, a freelancer or a contractor, it is important to have systems in place before you start your own venture. Consider funding as the most important key to fuel your business and get it going.

2. Legal Duties – as a director of your own company you must be aware of the responsibilities that awaits you once you’re in. Your legal responsibilities include;

• Register your company at Companies House (you’ll be registered for Corporation Tax at the same time)¹
• Annual Accounts and Annual Returns/Confirmation Statement must be filed at Companies House.
• Annual Company profit must be reported to HMRC
• All employees must pay income tax and national insurance

3. Share Structure – consider how your company will be structured, will you own 100% of the company’s share? The key is to keep it simple, take note that the number of shares will determine the dividends and profits which will be received based on the company’s sales. Each share that is allocated to you as shareholder, you must pay the limited company as a separate legal entity for the value of the share. The payment is known as a dividend which does not attract national insurance, meaning you can retain more of your contracting income.

4. Beware of the IR35 rules – if it’s your first time in contracting, be aware of the ‘off payroll’ IR35 rules, it covers all private and public sector contractors. The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.²

Step-by-step guide in setting up an LLC for contracting

1. Decide what type of limited company you’ll set up. Consider the industry of your business venture; it can affect your taxes and the way you source for funds. To help you decide you can get advice and financial help from different government support helpline.⁴

2. Choose a name, shareholders or guarantors, directors and company secretary to form your LLC. You should choose an exclusive company name and check existing trademarks, appoint a director, you do not need a company secretary for a private limited company but a director can also work as secretary but not as auditor. Form your LLC following the incorporation process; fill-out documents needed such Memorandum of Association and Articles of Association.

3. Open a Business account. Once you formed your LLC, you will need a business bank account for your company to monitor the company’s flow of funds; it must be separate from your personal bank account. Set up a business bank account with your company’s credentials and address.

4. Comply with the government’s tax requirements. When you set up your limited company, you automatically get different reporting dates for the first: (a) annual accounts you send to Companies House (b) Company Tax Return you send to HM Revenue and Customs (HMRC). You may also have to file 2 tax returns to cover your first year in business.⁵

5. Arrange your Professional Indemnity Insurance. Before you start your operations, you need to protect yourself and the company from any claims of negligence, loss of data intellectual property violations, or claims of dishonesty. Most clients look for appropriate insurance before doing business with your company.

6. Provide an invoice to your clients and keep all important records. Provide an invoice to all services rendered to your clients, it will help you lessen your income taxes. Keep all important records of your company, including contracts, financial and accounting records and records about your company.

How much does it cost to start an LLC?

Costs associated in forming a Limited Liability Company In the UK it is relatively low compared to other developed countries, below are estimated costs you’ll incur in setting up your own LLC for contracting.⁶

There are several ways to incorporate a company;

1. Directly, via the Companies House Web Incorporation Service – takes up to 24 hours (£12).
2. Directly, by post, using Form IN01 – this takes 8 to 10 days (£40).
3. Same-day incorporation via Companies House (£100).
4. Via an intermediary, such as a formations agent (various prices).
5. Via an accountant (various prices, sometimes included if you sign up as a client).
6. Professional Indemnity Insurance, £300 - £400 per year for £1 million or more coverage)
7. Wise Business company formation tool, where you can create a limited company in the UK and open a Wise Business multi-currency account in one go

Save time and money while scaling up your business

One of the most crucial parts of every business process is managing cash flow and all other financial transactions. There are plenty of services that you can use for this and you can even find a package that contains all kinds of tools your business needs.

However, what’s hard to find is a reliable and cost-effective payment processor to execute all kinds of payments you might need. If you only transact locally, you can get away with just your business bank account, but if you need to make international transfers, it suddenly becomes more expensive and slow. Using traditional banks, you could be paying 3 - 6% of the amount being sent or received due to poor exchange rate and high transfer fees.

Luckily, there are a few services like Wise Business that can reduce over 40% of the total cost by using the real exchange rate with no mark-up and with a fair, transparent fee.

Using Wise, you can receive payments from overseas for free, convert between currencies in the account, and make multiple payments to your supplier and contractors in just a few clicks. You can also take advantage of the following additional features:

• Multi-currency debit card attached to the account
• EUR and GBP direct debit
• USD global - pay overseas contractors in USD
• Linkable to accounting software such as Xero
• Automated batch payments through open API to save you time and streamline the process