There are numerous reasons why a corporation may want to operate as a limited company. These are some examples:
Protection from 'limited liability' in the case of a business failure. The 'limited' part of a limited company means that you should not be personally liable for any financial losses incurred by the business in most situations. However, if you have little private assets to safeguard or are unlikely to take large risks or incur large debts, this may not be a significant benefit to you.
Having a limited company accounts can help you present a professional image, which may be vital if you want to build and grow your business.
You could save money on taxes and National Insurance (NIC). This is frequently due to the fact that you will receive income from the company in both salary and dividend form, and dividend money is treated more advantageously than salary income because it is not subject to NIC. Furthermore, company tax rates are often lower than income tax rates (more on this below). There may be certain drawbacks to receiving money from the corporation in the form of dividends rather than pay or compensation. Dividends are considered investment income rather than employment income; for example, they were not recognised as 'pay' for the purposes of the Coronavirus Job Retention Scheme, limiting assistance funds for directors.
Some clients may request that you work through an intermediary, such as a limited company or an umbrella company, in order to save them money (there is no PAYE obligation and no employer costs such as Employer NIC when paying a company). They may also be wary to work with a sole trader since HMRC may conduct a PAYE investigation and determine that the individual should have been classed as an employee. Placing an intermediary (such as a limited company or an umbrella company) between them and the individual protects them from this.
How can low-wage agency workers wind up in small businesses?
Historically, agencies/umbrella businesses have encouraged or placed some lower-paid agency workers in limited corporations in one of two ways:
The primary motivation for establishing a limited business at some point in an agency worker supply chain is to increase profit/reduce liabilities on behalf of another firm in the chain. When an agency or umbrella pays a limited company rather than a worker, it is a business-to-business transaction in which they have no 'employer' fees or duties, which can save them money. An extra revenue stream can be generated by the fact that most employees in limited firms will require assistance from an accountant in running the limited company and can thus be compensated for this service.
If you work through an agency or umbrella company and are unsure if you have a limited company set up, check with the agency or umbrella firm. You might also use the Companies House website to look for your name.
What are the most important considerations if I work through a limited company?
People who own their own limited company will be directors of their firm and, in most cases, will also:
the company's shareholder and the company's employee
The company is a legal entity distinct from its directors, employees, and stockholders.
The company is frequently contracted to offer particular services, and the director (as an employee of the company) performs those services.
Because of this, your company will have to:
Companies House requires annual accounts and an annual confirmation statement.
submit a corporate tax return to HMRC and pay any corporation tax due on profits
keep accurate financial records of the day-to-day operations of the firm
As a director/shareholder, you will very certainly be required to file a Self Assessment tax refund in your individual capacity each year.
If directors receive a remuneration from their own limited company, it should be paid under the Pay As You Earn (PAYE) system.
You will also need to monitor the limited company's commercial income and check on a regular basis to determine if the company has to register for VAT, as the VAT regime applies to all enterprises, including companies.
In addition to all of the administration, there are several rules governing the obligations of directors, and their activities are scrutinized by the courts. As a director of a limited company, for example, you must use your talents, expertise, and judgement to help the firm succeed while adhering to the rules outlined in the articles of association (the company's internal rulebook).
GOV.UK has more information on director responsibilities.
How am I paid if I work for a limited company?
If you operate through your own limited company, the limited company will be engaged to undertake the work (either directly or through an intermediary such as an agency/umbrella company), and you will then carry out the task on behalf of the firm as an employee. The limited firm, not you, will issue invoices for your services. Money coming in belongs to the firm, not you, and should be deposited into the company's bank account rather than your personal bank account.
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