Contractor Accounting Guides: The Limited Company Option

Please provide a rating, it takes seconds and helps us to keep this resource free for all to use

[ No Votes ]

New contractors are often confused about whether they should go for a sole trader route or set up as a Limited Company. In this article of "Path of Education for New Contractors", we address the following points.

  • What is a Limited Company?
  • Advantages and challenges of a Limited Company
  • Is a Limited Company the right option for you?
  • Registration of a Limited Company
  • Cost of setting up a Limited Company

What is a Limited Company?

A Limited Company is a separate legal entity responsible for its liabilities, income, accounts and taxes. The number of Limited Companies in the UK is increasing as more and more contractors are choosing this option. As per data from Companies House, nearly 426,500 Limited Companies were registered in the year 2011-12. Let us look at some of the key aspects of a Limited Company.

Director: The Director is usually the founder or founding entrepreneur who is legally responsible for managing a Limited Company. Anyone over 16 can be a Director. Directors' responsibilities include business management and handling accounting, financial, legal and taxation matters.

Share capital: Share capital is the amount invested in the business in exchange of a share of the company. Let's say you are investing £5,000 cash in your business, your share capital will be £5,000.

Issuance of Shares: Every Limited Company should issue shares to its shareholders. There are no rules regarding the number of shares to be issued. If you are the only shareholder with a share capital of £5,000, you can issue either one share of £5,000 or 100 shares of £50. Similarly, if you have three shareholders contributing £15,000 towards capital, you can issue three shares of £5,000 each. If you have any doubts about the number of shares to be issued, you should consult a professional agency.

Shareholders: Shareholders are people who own a share in the company and have certain rights and responsibilities. A Limited Company Director cannot take any major business decisions without the approval of other shareholders. Each Limited Company in the UK should have at least one shareholder, who can be the company Director.

Accounts: A Limited Company has to manage its own set of accounts. However, compared to a sole trader, it has to comply with more stringent accounting requirements. Limited Companies are required to maintain detailed account statements, which need to be submitted to HMRC and Companies House.

Taxes: Taxes are calculated on profits left after deducting expenses from income. A Limited Company has to pay taxes as per the corporation tax rate, which can be less than the personal income tax rate for higher incomes. Also, Directors of a Limited Company can draw profit after tax, as dividends, which has a lower tax rate compared to the income tax rate. However as a Director you are an employee of the company and any salary will be subject to Pay as You Earn (PAYE) and National Insurance Contributions. To save personal income tax, Directors of Limited Companies often pay themselves a salary, which is lower than the personal allowance limit.

National Insurance: Limited Companies are liable to pay National Insurance Contributions. As an employer, a Limited Company has to pay National Insurance under Class 1, which is 13.8% of the salaries and benefits paid to employees. Additionally, the salary drawn by Directors is subject to National Insurance. However, most Directors choose to pay themselves salaries, which are lower than the National Insurance limits. No National Insurance is payable on dividends.

Liabilities: The contractors or the owners of a Limited Company are not liable for the entire company, but only for their stake in the company. So let's say the share capital of a Limited Company is £15,000, and you own shares worth £5,000, your liability is limited to only £5,000.

Company Name: All UK-based Limited Companies should have names ending in 'Limited' or 'Ltd'. It should be noted that in the UK, two Limited Companies cannot have the same name. Many resources are available online for finding an exclusive company name. Detailed rules on naming of Limited Companies can be found on the Companies House website.

Company Address: Every Limited Company needs to have a registered address, which is a formal address for correspondence. The registered address should be a physical address including street name, name of the town, pin code, and not just a P.O. Box number. The registered address can be different from the business' operating address. You should note that the registered address will be visible on the internet to everyone who searches for your company.

Company Secretary: Until April 2008, it was compulsory for every Limited Company to have a company secretary, but now it is optional. Some responsibilities of the company secretary are managing the registered office, managing company meetings, managing company's records, filing the annual returns with the Companies House, and so on. If a company decides not to appoint a company secretary, the Director is responsible for all these activities.

Articles of Association: The document named 'Articles of Association' includes all the rules of running a Limited Company, the principals of which will be agreed by the Directors and the shareholders. Typically companies use the Companies House's model Articles of Association, which includes default rules around liability of members, Director's roles and responsibilities, appointment of new Directors, distribution of shares, and other details. You are allowed to make changes to the model Articles of Association as long as you don't include anything illegal.

Advantages and Challenges of a Limited Company

Among the various options of legal structures for new contractors, the popularity of Limited Companies is growing because of their many advantages. However some aspects of a Limited Company may appear challenging to new contractors.

Advantages of a Limited Company:

  • Lower taxes
  • Access to a higher number of clients, who may not deal with sole traders
  • Personal assets, such as house, are protected against debts or any losses to clients
  • Greater credibility
  • Easier availability of finance
  • Ease of setting up
  • Easier succession planning or transfer or sale of shares

Challenges of a Limited Company:

  • More rules as opposed to sole trading
  • Accounting is difficult and so higher accountancy fees
  • Higher penalty for not following rules
  • Cash withdrawal for Directors restricted to either salary, dividend or loan

Is a Limited Company the right option for you?

As you can see, there are more advantages to setting up a Limited Company as opposed to disadvantages. Whether you want to register as a Limited Company will depend on several financial, legal and even psychological factors. A Limited Company is ideal for you if:

  • You want to save taxes on your income
  • You are motivated by the prospect of becoming a company Director
  • You want access to more clients and higher amount of capital
  • You want to limit your business liabilities and safeguard your personal assets
  • You want to grow your business and intend to add other shareholders to your business
  • You are willing to take responsibility of managing the accounting and taxation of your company

Registration of a Limited Company:

Let's say you have decided to set up a Limited Company. Before starting a business, you need to register your company with Companies House. You need to provide the following details for registration.

  • Company Name
  • Company's registered address
  • Director details (Minimum one Director required)
  • Minimum one shareholder, who can be can be the same as the Director
  • Number of shares and their total value
  • Name and address of shareholders
  • Articles of Association

Once you have the above details, you can register a company by paying a registration fee to Companies House.

Cost of Registering a Limited Company

There are three ways of registering a Limited Company with Companies House, and the cost varies by your choice of method.

  • Online: If you register your company online via the Companies House website, it will cost £15.00. Note that you can register online only if you are using the model Articles of Association.
  • By Post: You can send a form by post to Companies House for a paper incorporation. For a standard service, the fee is £40, and it will take 8 to 10 days for processing the documents. The same day service fee is £100 in which the incorporation can be done within the same day. If you choose to use your own Articles of Association, you need to send your registration details by post.
  • Through an agent: You can use the services of an agency for registration of your Limited Company. Apart from registration assistance, a professional agency can even find an exclusive name for your company. Prices will vary.


As you can see, it is not difficult for individuals to start their own Limited Companies. But, compared to a sole trading organisation, the process of setting up a Limited Company is more complicated. New contractors have to worry about many other things like managing finances, generating ideas to secure clients, building their business network, etc. Our site has many tools for Limited Company contractors to help them with invoicing and accounts, including managing balance sheets. If you are considering hiring an external agency, you can get in touch with Tempo, who will assist you in accounting, taxation and company secretarial services.

Tempo also provides company registration services, including finding an exclusive name. If you are operating your business from a home, and you don't want your home address to become publicly available, you can consider the registered office service of Accounts Direct.

Contractor Calculators

You may also find the following contractor calculators useful for your salary and tax calculations.

If you are looking for accounting support with your new limited company or if you need support setting up your accounts as a contractor, iCalculator recommends Tempo, a solid, dependable company that the team at iCalculator have known and worked with since 2009.

Self Assessment Guides for Contractors and Freelancers