Thinking of becoming a contractor and wondering how to set up a company?
If you are thinking of contracting rather than working as a temporary worker on PAYE payroll, you will need to check first if you qualify under IR35 as a contractor.
Assuming you do, how do you go about setting up a company? Some simple steps below (bearing in mind I’m not an accountant so worth checking the detail).
- Decide what sort of company you want to have.
- Sole trader, a one man band you don’t have to register with companies house but ultimately will be responsible for all debts and pay tax and a personal tax rate. Only one individual the ‘sole trader’ can own the company. https://www.gov.uk/set-up-sole-trader
- Business partnership similar to above but you can have multiple business partners with just one partner responsible for records. This doesn’t have to have limited liability. If it isn’t Ltd, then each partner pays tax at personal tax rates according to income. In addition if not Ltd, then the owners are personally liable for any debts. https://www.gov.uk/set-up-business-partnership
- Ltd company. This is a legal entity in its own right, so you pay tax on the company (corporation tax is lower than most individual tax rates at 19%) and you aren’t liable for debts if it is folded (unless you have personally signed for them). On the down side there are more reporting responsibilities. https://www.gov.uk/set-up-limited-company
- Setting up a Ltd company seem onerous but in reality it’s something you can do in very little time. Many buy an off the shelf company and then change details like company directors and name, as it is very quick. If you google ‘buying an off the shelf company’ you will find lots of options for under £100. The other option is to register one from scratch, once you have chosen the company name, Directors, the share structure and address (can be home address) you can register online at companies house. A ltd company must have a bank account so once you have the registration details, you need to set on up.
- Find an accountant, not essential but very useful particularly if a Ltd company where you must report every year. Small one man operators are often cost effective options. With zoom and electronic accounting packages it isn’t necessary to have someone nearby.
- There are several software accounting packages aimed at small businesses, such as Quickbooks, Freshbooks, Freeagent and Xero. A quick look in a search engine will give you several options.
- Register for VAT? You only have to do this if your turnover is £85k or more. It is a bore as you have to fill in a VAT return every quarter. The advantage is you can claim back the VAT on everything you buy.
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