Before your decide whether your business should be a limited company or not you should think about the advantages and disadvantages that can come with this sort of set up.
A limited company is a separate legal entity and a primary benefit is Limited Liability. Basically, this means that you would normally avoid being personally responsible for the company's financial obligations. However, this can be somewhat misleading as your main creditor is likely to be a bank and they normally require directors be personal guarantors should the company fail.
There is also currently a real tax benefit to be achieved from incorporating as the tax system for companies is very different to that for individuals. For businesses with profits of £10,000 to £15,000 the tax saving could be in the region of £300 to £500. However, tax systems and legislation change and the government is always looking at measures to put a stop to "income shifting" (allocating income purely on the basis of minimising the tax bill rather than the individual contribution to the business).
Other potential benefits of incorporating (even for one-person operations) are that once the Company name is registered then it is immediately protected as Companies House will not allow the registration of another identical Company name. You should remember though, that Domain Name Registration on the Internet is not automatically protected as these names are not registered in the same way and are not dealt with by Companies House.
Companies who become Limited can use this as part of their corporate identity. The Ltd in a company name can give the sense of image, stability, sophistication, credibility, and permanence and may help when trying to secure large contracts.
When Limited Companies are raising capital they can issue stock to investors to raise capital which may be more advantageous than borrowing and making interest payments. A corporation can also issue and sell additional stock. This can take away some of the reliance on the banks or other money lenders.
The annual compliance requirements for a company in terms of administration and accounting tend to result in costs being higher with a Limited Company than for a sole trader or partnership. Annual accounts need to be prepared in a format dictated by the Companies Act and, in certain circumstances; the accounts need to be audited by a registered auditor. This may increase the professional fees but these should be more than offset by the tax savings being made.
So, you've just won your first contract and your agency is asking you for the details of your UK limited company. What do you do; should you setting up a limited company? How do you know whether the limited liability company route is best for you, or would an alternative trading option be better? There are advantages and disadvantages to running UK companies. It is your personal circumstances, your career plans and aspirations and the nature of your contract that will determine the right trading option for you. You may also find that the decision is taken out of your hands, and that your agency or client insists that you set up a limited company before they will even do business with you.
UK limited company advantages
Company formation is incredibly fast and inexpensive. You can register a limited company with Companies House, the UK agency which regulates every ltd company in England and Wales, in a matter of hours and for as little as a few tens of pounds if using an online service. As a contractor you can benefit from significant tax advantages by trading through a ltd business. Most contractors pay themselves a minimum salary and take the company profits as dividends, which can result in much higher take-home pay compared to being paid a salary from other trading options.