Introduction -forming a limited company
What is the process when setting up a limited company for contracting, and what does it cost to set this up? There are various things to do when you are forming a limited company for future contracting and we will consider the steps involved in contractor company formation in the article.
Companies House is the UK’s registrar of companies, and they are part of the UK government. They register new companies, and they dissolve companies that close down. What’s more, the register also shows specific data about each UK limited company. The Companies House public register shows all of these details and is available for the public to view online.
First steps when you are setting up a limited company for contracting
When you organise your contractor company formation for the first time, you may be moving from an employment role or working via an umbrella company. Many sole traders also look to convert to a limited company once their business generates increased income and profits.
There are specific steps for you to follow when you register a limited company. We will go over these step by step below. We have a guide that covers moving from an umbrella company to your own company, and it sets out what you need to consider when doing this. There are also crucial differences to consider when you compare contracting to freelance in the UK, which is worth looking at.
When you set yourself up as a limited company contractor for the first time, it would be a good idea to list your pre-trading expenditure. We have a first-timer’s guide to contracting in the UK, giving a complete overview of what to consider when you start.
If you are moving from an umbrella company to working through your own company, please read our article, which covers tax tips for contractors.
How to set up a limited company as a contractor
The options available
First of all, when you are forming a UK private limited company, you have two choices. These options for contractor company formation are:
- You can set this up online via the Companies House website, or
- One can complete form IN01 and post this on to Companies House.
A different method you can use when we consider how to set up a limited company as a contractor is to use a third party. This method will help to save you some time. The choices here are your accountant or a formation agent.
Your accountant will likely set this up for you for free if you sign up for a monthly payment service. The amount you will pay will depend on what type of service you take out with them e.g., a full bookkeeping service or a digital platform type service.
If you use a formation agent, they will offer several formation packages. Besides forming a company, they may also include VAT registration, use of a London address for your company registered office, setting up a company bank account for you and other options.
Companies House charges a fixed £12 fee if you apply for a new company online. On the other hand, the cost is £40 if you do so through the post.
Forming a limited company -other initial thoughts
If your contractor accountant sets up your new private limited company for you, they may charge you a one-off fee for this. Please note that they may also provide this service for free if you agree to sign up with them as a new client.
You will need to provide the same information to Companies House, whichever method you choose.
When running your own company, it is good to know your company’s future filing due dates. It is also good to know what documents the company will need to file each year, e.g. the annual accounts and Confirmation statement etc.
When you look at how to set up a limited company as a contractor, something that you must do is choose the directors and shareholders for the business. As this will be your own company, you will likely be both. Also, when you become a director, you will have specific director duties to bear in mind from the outset.
The choices to make when forming a limited company for contracting
One of the first things to decide when setting up a new limited company is your choice of a company name. What’s more, there are specific guidelines that you need to follow with regard to this:
- Your company name cannot be identical or similar to an existing company name.
- The choice of name should not simply be that your business is a connection of the Government or local authority.
- Certain punctuation symbols are not allowed.
- You must have the required permission to include certain sensitive words that relate to the government. These words include bank, Britain, chartered, king, queen, and many others. Here is a complete list of these.
Registered Office address
Every UK company must have an address where it can receive any official mail. This address is called the registered office. Many contractors will use their residential address; however, you may be able to use your accountant’s address, and many contractors will choose to do this. A further option open to you is to use a service provider.
Note: If you set up a company in England or Wales, the registered office must be within England or Wales. The same rule applies to Scottish or Northern Irish companies.
Officials of the company
When forming a UK company, you may also decide to appoint a company secretary. Today, however, there is no legal requirement for small companies to have a company secretary.
When you apply to set up your company, you will need to have all of your officials’ details to hand. These details include the full names, addresses, nationalities, and dates of birth. If you have concerns about the privacy of your home address, you can elect to use a ‘service address’. By doing this, your residential address will not appear on the public record.
Every UK company has a trading activity. Therefore, as a limited company contractor, you will need to decide what best describes what you do. Companies House has a standard list of codes you can refer to when deciding which best summarises your business activity.
Each trade/industry has a unique SIC code to identify what a business does. Furthermore, section J of the SIC code list is likely to interest contractors the most. Please read our other article, which explains the SIC code with Companies House in more detail.
When setting up a limited company, you will also need to decide on your company’s share structure. Therefore, you will need to choose:
- Who the shareholders will be.
- The number of shares in your company. Usually, most companies will set up with 100 shares. The shares will typically have a value of £1 or 1 pence each.
- How many shares each person will hold.
Please note that it is also possible to set up different classes of shares in your company.
As a shareholder in your own company, you could decide to own all of the shares yourself. A further option is that you could split the shares between you and your spouse. An additional option could be to bring in other people as shareholders.
In the future, your company may declare dividends. If it does, it must distribute and pay these in the same ratio as the shareholdings.
Most contractors who set up their own company either:
- Make themselves the sole shareholder; or
- Make themselves and their spouse the shareholders. You could also decide to pay your spouse a salary if they do some work for your company, e.g., admin-type tasks.
When considering your company’s share set-up, the best thing to do is to talk to your accountant.
Once you know your shareholders in your company, you will need to gather their information. These details will include their full name, address details, class of share, and the number of shares they will own.
Forming a limited company -registers and official documents
As part of forming a limited company, all companies in the UK must also now keep a record of all ‘People with Significant Control’ (PSC).
A PSC is someone who:
- Holds more than 25% of shares or voting rights in a company.
- Has the right to appoint or remove the majority of the board of directors, or
- Otherwise exercises significant influence or control.
After the initial set-up of your company, the PSC information will need updating via the annual Confirmation Statement. All companies need to submit this form to Companies House each year. As a result, this will keep the UK Companies House register up to date.
Certificate of Incorporation
After forming your UK company, you will receive the Certificate of Incorporation (UK). This is an important document, and you can view this as your company’s birth certificate. The document proves that your company exists, and you may need to provide this to third parties such as your company bankers and future clients.
Articles of Association
In the UK, all companies have a set of Articles. These, in turn, act as a rule book. The Articles will govern all aspects when you run your own company.
The articles include:
- Decision-making by shareholders.
- How the company will distribute dividends.
You can elect to use ‘model articles’ (this is a generic document), which should suffice in most cases.
When you set up your company, you may decide to create your own set of articles. If you opt to do this, you cannot set up your company online. Instead, you must use the postal method here (Form IN01).
Memorandum of Association
This agreement confirms the intention of initial subscribers to form a company in the first place. It will also have the following wording:
`each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share’.
A list of all of the subscribers will follow this wording.
The Memorandum and Articles of Association are two important documents. Therefore, you should store these in a safe place. In most instances, your accountant will usually look after these for you.
When you set up your company, Companies House will pass the new company details on to HM Revenue & Customs (HMRC). As a result, HMRC will issue your company with a Corporation Tax number, and you will use this number in the future when you file a company tax return.
What to do after forming a UK limited company for contracting
As a new limited company contractor, some more tasks that you will need to do or may need to think about when you are forming a UK company include:
- Set up your business bank account. You can do this in the branch or online via the bank website. Please note that it is now much easier to do this online nowadays.
- Choose an accountant for your business. It would help if you researched here to pick the best one for you. A good, experienced contractor accountant will help advise ways for you to operate tax efficiently and maximise your tax relief.
- Check if you need to register for VAT. As part of this, you will need to consider whether the VAT Flat Rate Scheme or standard VAT scheme is the best option for you -today, the standard scheme is the usual choice for contractors as they are better off using this. If you need to register, your accountant will be able to do this for you and help you file your quarterly VAT returns in the future.
Some other things to do after setting up a limited company for contracting are:
- Learn what your company’s statutory records are and how to look after these. When you appoint an accountant, they will usually do this for you.
- Register for Corporation Tax within three months of carrying out some business through your company. Nowadays, when you set up your new company, Companies House will contact HMRC for you.
- If you will take a contractor salary in the future or have other employees such as your spouse, your company will need to register as a new employer with HM Revenue & Customs (HMRC). HMRC will then set up a PAYE scheme for your business. In most cases, your accountant will do this, and they will also look after any submissions to the tax office.
- If you like to be organised, a good start when you have your own company is to be aware of when the various filing dates are for the filing of documents and the payment of company and personal taxes.
- You might also decide to set up your business website to help promote your business.
Many contractors will use their accountant to set this up when forming a UK company. When undertaking this process, you may prefer them to do this. On the other hand, you can perform this process yourself, by following the steps for setting up a limited company for contracting as described above. As a final thought, the actual setup process online takes between 15 and 30 minutes.
Finally, if you are considering closing your company for any reason, there is a particular process to follow.
Link to Contractor Advice UK group on