Pros and cons of a limited company

For many contractors, it makes financial sense to work through their own limited company. Plus, many organisations and agencies will only work with limited company contractors.
We’re sure you’ve heard the many myths that surround setting up and running a limited company. To set the record straight, this article lays out the advantages and disadvantages of a limited company.

Let’s start off with the positives and discuss the advantages of contracting through a limited company.

Pro’s of a limited company

Limited liability

For many individuals who are considering becoming a self-employed contractor, one of their biggest concerns is what liability they’ll have if it all goes wrong. Our 20 plus years’ experience as a contractor accountant has shown us that it rarely does go wrong. But if it does, you’ll be pleased to know that legally a limited company is classed as a separate entity to yourself, so your personal liability is limited.
Therefore, everything from the business bank account, assets that are held by the company and the involvement in contracts all relates to the business and not you.

Tax savings

The second biggest advantage of incorporating your business is that significant personal tax savings may be available, which can result in you taking home more money. This is because it is more tax efficient for a contractor to take a small salary and the remainder through dividends as dividend payments are taxed differently and aren’t subject to National Insurance Contributions. As such it makes more sense to do it this way than solely through taking a salary.

Expenses

Another reason for working as a limited company contractor is that you are able to claim a large range of expenses, as long as they are legitimate business expenses. The type of things you can claim for as a legitimate business expense include; marketing and advertising costs for the business, stationary and postal costs, accountancy fees, mileage costs and even pension contributions – so you can build your pot of money for retirement whilst reducing your companies tax liability.

Claiming limited company expenses is where most contractors make mistakes, but luckily for you, we’ve laid down everything you need to know in our article, ‘Perks of being a director of a private limited company.’

Credibility

Finally, operating as a limited company can present you in a professional manner. And in some industries or sectors (like the public sector), organisations and agencies will only take you on if you work through a limited company. So, by not incorporating your business, you may be losing out on the opportunity to work on lucrative contract roles.

Con’s of a limited company

The advantages of operating through a limited company greatly outnumber the disadvantages, and this is why most contractors choose to work this way. But there are a couple of downsides that you need to be aware of.

Paperwork

Firstly, running a limited company involves a certain amount of administrative duties, particularly around paying taxes and filing paperwork with Companies House. As a director of a limited company, you have an obligation to make sure all statutory documents are delivered to Companies House by their due date. Failure to do this can be a criminal offence.

Time-intensive

Secondly, the accounts of a limited company can be complex, and it can be time-consuming to get yourself fully up to speed on all the tax rules and regulations you have to abide by.

You can greatly reduce your stress of doing these two things by engaging the services of an experienced contractor accountant to assist you. With over 20 years’ experience in the contracting sector, we class as ourselves as experts in handling contractor accounts.
If you’re ready to take the step into contracting, click here to download our free guide to contracting. Or, speak to one of our directors on 01962 867550 to find about our monthly accounting packages.