How to set up a contractor limited company in 10 steps

Setting up a limited company is a tax-efficient way of running your own contracting business.

Here, I’ll guide you through how to set up a contractor limited company in 10 steps, writes Chris Littlewood, senior accountant at inniAccounts.

1. Decide on a name for your business

Your company name is your brand so it’s important to reflect the impression you want to give prospective clients.

There are practical things to consider. For instance, ‘Jane Smith Limited’ could already exist so you might need to consider a more abstract name so yours is unique. 

Companies House, the company registrar in the UK, keeps a register of names and stipulates guidelines to follow. It’s potentially worth speaking to a trademark attorney too. They often do searches for free to check the name won’t infringe on other brands.

2. Appoint directors for the company 

If you want to pay yourself in the most tax-efficient way, then you can appoint yourself as a director when you register the company.

You will then have legal obligations such as ensuring the company always acts within the law, all tax and national insurances are paid in full on time, and all company accounts/reports are filed accurately and on time.

3. Decide on shareholdings

When you come to register the company with Companies House, you need to outline the share structure. If you will be the sole owner of the company then you’ll have 100% of the shares. 

For tax efficiency, you can appoint a spouse, civil partner or someone who works for the company as a shareholder, whereby you are a majority holder and they own a smaller proportion.

Many contractors do this to distribute the profits - dividends - from the company in a tax-efficient way to the family household.

But appointing your spouse or partner as a company shareholder is governed by HMRC legislation, so check with your accountant or a tax adviser before making this decision.  

4. Memorandum of Association (MOA) and Articles of Association (AOA)

These are legal statements, signed by all initial shareholders or guarantors agreeing to form the company.

You can get standard or ‘model’ articles but if your work will require compliance with the off-payroll working rules (IR35), then you should consider providing a more specific outline, as it can protect you should a case ever be brought against you by HMRC.

5. Register the company with Companies House

Next, actually register the company with Companies House! You can register directly online with Companies House, or via an accountant or through a company formation provider.

You’ll need to provide the names of the directors, their home addresses and the legal trading address for the company.

The registered company address is publicly available so some people choose to protect privacy by using their accountant’s ‘registered office service.’ 

6. Register for tax with HMRC

After your company is formed, you or your accountant will need to register for tax with HMRC. This process includes registering for Self-Assessment and Corporation Tax.

You’ll need to register for VAT if your company turnover is over £85,000, and PAYE if you plan to pay salaries from your company. 

7. Open a limited company bank account

The process of opening a company bank account is similar to opening a personal account.

You need proof of ID, your address details (usually for the past three years), expected turnover figures, and proof of company incorporation. In some cases, you may need your company UTR (Unique Taxpayer Reference), which is a 10-digit number issued by HMRC when you register for Corporation Tax. 

8. Get your new limited company's day-to-day admin running smoothly from the off

At even the pre-trading stage, as your limited company’s director you need to know what you can expense – for example laptops; mileage, branding, corporate mobile contracts. Our tip? Ensure you capture it all in real time.

We think most contractors will attest that it’s worth using an online accountancy package to help you manage your company’s invoices, expenses and payroll. The best cloud accountancy platforms quickly and comprehensively help you predict your company’s tax liabilities, while letting you see other key metrics of your company, like profitability. For ease-of-use, look for one that integrates with your bank and comes with an advisory wrap included in the fee.

9. Understand your exposure

What happens if you have a dispute with a client? Or have an accident or get sick? Professional indemnity insurance, and professional liability insurance (often stipulated by clients you supply to), are a must, as is private medical insurance.

Membership bodies like IPSE can help you determine the best cover for your circumstances. Remember that some products will need to be declared for tax purposes. 

10.  Plan ahead now that your 'LTD' is formed

There are two aspects to running a newly formed limited company that are often put aside by contractors until it’s too late: pensions and a ‘war chest’ for the quiet times.

Get advice on the right dividends model for you, and with tax planning so you can plan ahead and optimise your safety net for the lean times while also building a pension tax-efficiently.