A limited company is a private company whereby the owners are legally responsible for its debts but only up to the limit of investment put into the company. If you are heading into contracting with a strong desire for increasing your take home pay or to be a director of a business, this is probably the one for you.
By trading as a limited company, you have complete control over everything including your finances and operations, your personal finances are not at risk should a problem occur with the business, and it allows a highly tax efficient manner of operating which in turn provides the greatest possible take home pay (assuming you fall outside the IR35 legislation which we will go over in more depth later).
This trading style also comes with the most responsibilities and administration, plus you will have to take into account the dreaded IR35 legislation which may affect the financial benefits of this particular trading style.
As a limited company director, you would be responsible for registering tax on your company income and ensuring all payments to HMRC are made on time. Companies incur different taxes to a PAYE employee, so you will need to be aware of them all:
A Limited Liability Partnership (LLP) is very much the same as a limited company except that it requires two members as opposed to one, and thus gains some flexibility both financially and in work-life balance. When it comes to tax, whereas corporation tax is applicable to a limited company, with an LLP, each member is taxed as an employee of the LLP. IR35 is therefore made irrelevant. Every LLP must have at least two designated members who will be responsible for the filing of company accounts, filing company tax returns and notifying Companies House of any changes. All members, including designated members, are responsible for paying their income tax and NICs as well as sending their personal tax returns.
As the limited company route is far more complicated than the other trading styles, we will be going over in more detail how to start a limited company, the IR35 legislation, contractor insurance and your responsibilities as a director.