Contracting via a limited company – advantages and disadvantages

As a contractor, it’s likely that you’ll have two options regarding the structure of your contracts. While joining an umbrella company is undoubtedly a growing phenomenon, the concept of launching a Limited Company is the one you’ve almost certainly considered.

But is this the right option for the future of your contracting endeavours? Let’s find out.

The Advantages Of Starting A Limited Company

Starting a Limited Company essentially means registering yourself as a business at Companies House. By taking this route, you can reap all of the following rewards;

  • Launching a Limited Company is the most tax-efficient way of working as you can pay yourself a small salary and take the rest through dividends, which are exempt from NICs.
  • Starting a limited company can be done for next to nothing, especially with online incorporations.
  • Those caught by the IR35 rulings may benefit from the flat rate VAT scheme or the 5% expenses allocation.
  • Having a company puts you in full control of all financial matters while also opening the door for future growth, including the idea of taking on employees.
  • Personal liability is restricted when you are a company director.
  • Simply boasting a company can present a more professional brand image to business clients compared to working as ‘just you’.
  • You can decide when to draw money from the company and can even pass shares to family members for added tax benefits.

While operating in this manner isn’t free from potential issues, there is no doubt that the benefits do make it an attractive prospect for many contractors and prospective contractors looking to take the next step.

The Disadvantage Of Starting A Limited Company

The umbrella company scheme wouldn’t exist if there weren’t a demand for it, and it is an alternative that deserves consideration as you’ll avoid the negative aspects facing company directors. Some of those problems include;

  • The Limited Company route is designed for those looking at long-term contracting. If your future isn’t stable, the alternative options may be better.
  • Running a Limited Company comes with more significant responsibilities and administrative obligations. Even if you’re planning to use an accountant, the umbrella company route is easier in this sense.
  • You will be required to file yearly records and complete a Confirmation Statement for HMRC.
  • When working through an intermediary, it can cause complications as you comply with the IR35 legislation.
  • Hidden fees can creep in, which is a contrast to the very clear umbrella company route.

The disadvantages are well worth remembering as some contractors will find that they outweigh the positives. Still, if it’s all about the financial outcome, the Limited Company is attractive – especially if you find a way to prevent it from consuming your time.

Which Is The Right Option For You?

There is no one right option for everyone, and it’s ultimately down to you to weigh up the pros and cons before opting for or against the Limited Company option. Whichever outcome you reach, it will give you the strongest platform as you embark on this new business venture.

If you are a contractor and need to compare umbrella companies then get started here