Trading Method - Personal Service Company (PSC)
When choosing to set up a limited company, consideration must always be given to the fact that not only are you working in a different way but you are also entering a whole new world of laws, rules and regulations that you must comply with.
Little things such as letter headed paper, business cards and a business name and identity, will all help to confirm that you are truly establishing a business in its own right.
So why choose a limited company?
You can benefit from the following:-
- You are your own boss.
- Flexibility - If you undertake small pieces of work or work on specific projects then working freelance may be more beneficial as you can hold concurrent contracts e.g. work for five different clients. This is not really practical on a PAYE basis as your employer will probably prevent you from working elsewhere. You would also be taxed heavily on having a second employment.
- Freedom - You can choose when and where to work and when to take holidays (and how many to take).
- Tax breaks - By using sound advice, you may be able to optimise your net income
As indicated by the name, a limited company also gives the owners protection against liability for the company's debts. For example, if the company became insolvent, a shareholder would only become liable for the value of his or her shares. As a director you would not be liable for company debts either, unless it is proven that you acted fraudulently or improperly.
Your client may benefit from using limited companies due to:-
- Increased flexibility (compared to permanent staff).
- No need for long term commitment (advantage when resourcing individual projects).
- Allows for use of highly trained specialists.
Please remember that there are also areas where it could be considered a disadvantage to become a freelancer and therefore it is essential that you consider the route most appropriate for your own individual circumstances.
When providing your services through a limited company you will not be entitled to receive employee benefits such as:-
- Holiday pay
- Sick pay
- Maternity and paternity rights
- Pensions
- Redundancy
Other factors include:-
- No certainty - There are no guarantees of future work when a contract ends
- Hassle - Legal obligations that go along with running a company, administrative burdens e.g. invoicing, expense submission etc.
- Decreased risk - You will be held responsible for areas such as health and safety, damage to property etc whereas in an employment relationship it is usually the employer who is responsible for such matters.
- Payment Terms - In an employee relationship, the employee typically gets paid on a weekly, fortnightly or monthly basis. When operating as a contractor, the service must be invoiced as per the contractual terms and conditions, and payment will only be made in accordance with those. For example, a limited company contractor may provide services for the whole of May and invoice at the end of May. They may not, however, receive the funds until the beginning of July as the client has a 30 day payment term. Many individual’s circumstances do not allow for such delays and therefore employment is more appropriate for them. There is also an increased risk of non-payment by the client e.g. if the client goes into liquidation it is unlikely that the contractor will be able to secure payment.
How do I set up a limited company?
Accountants, solicitors and formation agents can arrange for a company to be incorporated on your behalf. The process is very simple and does not take much time.
You will need to determine who the directors of the company will be, as well as the the shareholders, the registered address and the name of the company as these are all legally required under company law.
The company secretary’s role is to ensure that the company is run according to company law principles. You may wish for your spouse or partner to undertake this role as the main duties performed are mainly of an administrative function. However, many individuals prefer to outsource this role to an accountant or solicitor to ensure full compliance. For more information on the secretary's role please view the Company Secretary Fact Sheet.
The Director must make sure the company is run properly in accordance with the interests of the shareholders and, of course, with all aspects of legislation. For more information view the Directors Fact Sheet and http://www.companieshouse.gov.uk/about/guidance.shtml
The registered office is the address at which the company resides for official purposes. This can be your residential address but must be within the same jurisdiction as the place of company incorporation. Again, many individuals choose to outsource this option to a solicitor or accountant.