5 points to consider before setting up a limited company
Posted on 19th June 2018 at 13:50
Thinking of becoming a contractor or setting up a small business? You’re not alone. According to the Office of National Statistics (ONS) self-employment has risen steadily since 2000. In fact, it’s widely believed that self-employed workers are the backbone of the British economy. If you’re abandoning a steady job in search of the freedom and success that contracting can offer, you need to know the key implications.
If you’re planning to set up a limited company, we strongly advise you to consider the following points before going ahead.
1. Contractor/small business owner vs employee
As a freelancer/contractor, you’re in charge of your own destiny. No longer held back by the rules and restrictions of being a 9-5 employee, you can make your own luck.
But it takes more than luck to build a successful business. You’ll need to be motivated, focused and resilient to ride the physical and emotional ups and downs of self-employed life.
Here are some things to think about:
Will you manage without a regular salary, sick pay and other company benefits?
Will you miss your colleagues/being part of a team?
Are you comfortable being the person in charge?
Will you have sleepless nights worrying about where the next client is coming from?
How will you manage if a client pays late, or not at all?
2. Are you ready to be a director?
You might feel a glow of pride at the prospect of being called a director. It’s not a role to be taken lightly, however. Even accidental incompetence or negligence could result in prosecution or having your directorship (and future directorships) taken away.
Under the Companies Act 2006, you will be legally required to fulfil a number of duties. You will need to understand these responsibilities and put processes in place to make sure you’re doing the right things at the right time.
3. Are you prepared to put in the necessary hours?
Escaping the monotony of the 9-5 life is a key factor in many people choosing to go self-employed. But you might be surprised to find that you are working harder and for longer hours, at least in the early days.
You’ll also need to fulfil many responsibilities within important statutory deadlines (for example, Corporation Statement, Self-Assessment) so you will need to be organised and plan ahead for these, to avoid penalties.
4. Is a limited company the right step for you?
Before you go ahead, make sure a limited company is the right set-up for your circumstances. We’ve listed a few pros and cons for you to consider:
You can increase your credibility with potential clients.
You’ll have the autonomy to increase your own take-home pay.
As you and your limited company operate as separate legal entities, there is less personal risk involved.
With professional advice, you can plan your finances in the most tax-efficient way.
If you’re only planning on freelancing/contracting for a short period of time, or on short contracts, it might work out to be an expensive way of doing things.
As a director of a limited company, you will be responsible for a number of time-consuming legal duties under the Companies Act 2006.
Your company information, including some personal details about yourself, will be held on public record.
5. Do you know if/how IR35 legislation affects you?
In simple terms, IR35 legislation determines whether you’re employed for a company as an employee or if you’re providing services to that company as a self-employed individual. More information can be found in our guide here.
If you’re providing services to clients (direct or through an agency) through your limited company, it’s in your best interests to understand IR35 and how it may affect you.
Why is this so important? If HMRC investigate you and conclude that you fall inside IR35, you could be liable for extra tax, National Insurance and financial penalties.
The legislation is complex and open to interpretation, so it’s imperative that you seek specialist advice and put together a plan to minimise the risk of being investigated.
Although these are all serious considerations, they shouldn’t deter you from chasing your dream. There’s every reason to believe you can make a go of it.
The key to success is to understand all the implications of setting up a limited company and seeking professional advice so you can put the appropriate plans and processes in place.
So you’ve considered all the implications and you’re ready to take the next step? Follow the link for our useful guide: How to set up a limited company: a guide for start-ups, freelancers and contractors
Nicola J O'Sullivan -
Founder | Xero Champion | IR35 Expert
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