limited company for freelancers in the UK

Choosing the right business type isn’t an easy task for freelancers.

You may follow the sole trader route, or start a partnership for simplicity. But there are definite advantages to operating as a limited company instead.

There are several types of limited companies in the UK. Each has its own set of pros and cons that suit different needs and expectations.

Limited companies are governed under the Companies Act 2006. And all company registration and records are managed by Companies House.

If you’re wanting to set up a limited company in the UK, make sure you check our dedicated article.

If you’re just curious about this type of company and how it benefits freelancers, let’s read on.

1. Why does a freelancer need a limited company?

Limited companies in the UK are limited liability organizations.

They have legal personhood with specific rights and duties under common law.

These include the right to own property, sign contracts, sue and be sued in their own name.

The owner or shareholder of a limited company is not responsible for its debts beyond the invested amount or lending.

As a freelancer, you’ll be seen as the owner of the business. So by forming a limited company, your personal possessions are safe from any losses.

Tax efficiency is also another reason for having limited liability in the UK.

The taxation rule for companies in the UK provides a range of incentives and benefits.

For instance, you can choose to be the director of a limited company and earn your income in the form of company dividends.

Dividends attract less tax than income or salary and aren’t subject to National Insurance Contributions (NICs).

If you operate as a sole trader, your entire income is subject to NICs. So with a limited company, you may receive a higher take-home pay.

2. How many types of limited companies are out there?

Generally, limited companies come in three flavors.

2.1. Private limited by shares (Pvt Ltd)

This is the most common entity structure for startups and SMEs in the UK.

To understand how a Pvt Ltd works, imagine dividing your company into slices (shares).

You’ll distribute these slices privately among shareholders, equivalent to the amount of money they invest. The shareholders are not liable for any debt beyond this investment.

For a freelancer, chances are you’ll be the only shareholder of your company. So, 100% of the company will usually belong to you.

A Pvt Ltd cannot sell its share to the public.

Compliance

  • Minimum of one director and one shareholder (can be the same person)
  • Submit Annual Confirmation Statement to Companies House every 12 months from your incorporation date; or, from the date you filed your last statement
  • File Annual Accounts to Companies House
  • Name must end with Private Limited Company or Pvt Ltd

Things to note

A Pvt Ltd requires high transparency.

The details of company directors, shareholders, and finances are kept under ‘public register’.

You also need to update Companies House and HM Revenue and Customs (HMRC) with any company’s changes.

For instance, change of business address, personal details, or shareholders.

As this takes away much of your privacy, make sure you consider carefully before registering a Pvt Ltd.

To get a good understanding of Private Limited Companies in the UK and how it could be beneficial for you, simply check out our dedicated article!

2.2. Private limited by guarantee

Unlike Pvt Ltd, a company limited by guarantee has no initial investment, shares, or shareholders.

Instead, the company is owned by guarantors who agree to pay a cash sum towards company debts.

If you’re forming a club, trade association or social enterprise, a company limited by guarantee is a great option.

However, if you want to obtain charitable status, you cannot distribute the company’s assets and profits to guarantors.

Compliance

  • Minimum of one director and one guarantor (can be the same person)
  • Prepare and file Annual Confirmation Statement to Companies House every 12 months from incorporation date; or, from the date you file your last statement
  • File Annual Accounts to Companies House and HMRC

Things to note

You don’t have to add the word “Limited” at the end of your registered company name if:

  • You’ve included the non-profit distribution clauses in the Articles
  • The objects of your company are to promote or regulate: Commerce, Art, Science, Education, Religion, Charity, or any profession incidental to the specified objects

2.3. Public limited company (PLC)

A corporate entity that may sell its shares to the public. The owners of those shares have limited liability.

All of the companies listed on the London Stock Exchange are PLCs.

Although PLC is not the most popular choice of company in the UK, it offers some prominent advantages.

For example, it can raise more capital by issuing public shares. Moreover, a PLC helps increase the ability to raise future investment and make acquisitions.

Compliance

  • Minimum share capital of £50,000
  • Minimum of two directors and two shareholders
  • File Annual Accounts to Companies House within 6 months of the end of the financial year
  • Appoint fully-qualified Company Secretary
  • Fill out form SH50 and send it to Companies House to receive a trading certificate
  • Include Public Limited Company or PLC at the end of the company’s name
Note

Note

If your first accounts cover a period of more than 12 months, you must file to Companies House within 18 months from the incorporation date. Or, 3 months from the accounting reference date – whichever is longer.

Things to note

The regulation for PLC in the UK is extensive.

You’ll need to hold annual general meetings for all shareholders.

The standard for PLC’s accounting is also higher and needs to be more transparent.

Furthermore, your PLC is also vulnerable to pressure from shareholders and takeover bids from rivals.

3. Is a limited company right for your business?

Using a limited company is a common practice among UK freelancers.

If you’re a startup and are low on budget, a limited company helps you save on taxes and keep more income through a favorable tax regime.

You’ll pay corporation tax at the rate of 19%, rather than income tax rate for sole traders – which is set at various rates and bands, depending on your income level.

You can also use limited companies to register for VAT, bank account, or payment gateway for your online eCommerce business.

If you’re working from home as an IT outsourcing or software development contractor, a limited company helps you reduce cost liabilities.

You can claim back utility bills or machinery purchases in the form of expenses under limited company structure. This will save you a ton of money for business growth and expansion in the future.

On the other hand, there can be some disadvantages. Mostly additional reporting requirements from HMRC and Companies House.

You must ensure to meet all statutory obligations, including preparation and filing of company’s accounts and returns annually.

If you are considering the limited company option, or any other route for that matter, feel free to contact BBCIncorp for support.

We have experience helping freelancers with company incorporation and compliant requirements. And we’ll be happy to help you find the right structure for your future.

Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.

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