Should I set up a Company or Not?
There is no right or wrong answer about whether to trade as a company. In fact, to be perfectly honest it almost comes down to a personal choice for most.
What I find helpful in making the choice is to ask yourself what you’ll be doing in 2 – 5 years’ time. You can usually fit yourself into one of the categories below:
- “This is a one-year contract, then I’m not sure what I’ll do”. I call this category the undecideds.
- “Once this contract finishes I’ll get another contract”. These people are the career contractors.
- “I’m going to build this into a business and look at employing people and leasing an office.” These are the businesses.
There is nothing wrong with being in this category but if you are I’d probably suggest that you operate as a sole trader rather than a company.
While you’re “dabbling your toes” in the contracting world, you won’t really need the benefits that a company can offer you, and if you decide that it’s not for you, then it’s a bit more difficult to close it down.
This is probably the category that is the most difficult to decide or give a recommendation on, and really comes down to how you want to run things.
In April 2017 The Government introduced new laws around having withholding tax deducted from contractors working through a recruitment firm. The law applies to you even if you operate as a company, which was a waste of time for many of our contractor companies. There is no point deducting withholding tax from a company when the company won’t end up paying tax anyway as all the profits get passed through to the shareholders.
- If you’re a contractor getting withholding tax deducted, then you might be leaning more towards running as a sole trader. If you do some quick calculations to work out what tax rate you should have deducted, it will almost feel like being an employee. You should be able to avoid having provisional taxes due and only end up with a minor end of year tax square up bill.
- We have some clients who like to trade as a company and set themselves up as actual employees, paying themselves PAYE salaries. This can be a good way of keeping things simple from a personal viewpoint (you’re just an employee), so you can concentrate on running the company.
This is really the only category where I would strongly recommend that you operate under a company structure.
- Limited Liability.
Although banks, landlords and a lot of suppliers try and get around the limited liability of the company it does still offer protection.
I quite often refer to companies as “vehicles” to trade out of. A common scenario would be where you might have two contractors (whether it’s a personal relationship as well or just a business relationship) both trading out of the same company.
Later, a new person may come into the equation and could be added as a shareholder, and there can be different percentages. For example, 40 / 30 / 30.
People can exit the company, passing the reins over to the remaining shareholders.
I talk a lot with clients about the need to keep business and personal lives and transactions separated. Sometimes its just easier to do this when you have a company.