The Graduate’s Guide to Running a Limited Company

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If you are already a graduate or are due to complete your studies shortly, your next steps will likely be a hot topic of conversation. With competition for jobs fiercer than ever, more graduates are choosing to reject the conventional 9-5 in search of the freedom which contracting provides.

But knowing where to start is not always straightforward; with so many uncertainties, running a limited company straight out of university can be a daunting prospect. Luckily, ClearSky are here to help and can provide all of the answers to your questions. In our guide, we have outlined the steps to running your own limited company to ensure that you are fully prepared.

What is contracting?

Contracting is the practice of working for a fixed period of time to perform a particular service as opposed to being an employee of the company. Contracts generally run for a limited period of time (on average, around six months). Depending on your contracting skill set, you may find that you are able to have a number of contracts at once. Writers, for example, may have a number of contracting clients at any given time.

The nature of contracting means you are not bound by a set schedule and number of hours. This means that you can complete work at times which are most suitable for you.

What are the benefits of contracting?

When it comes to your career choices, contracting can be an exciting alternative to working as a company employee and are plenty of benefits which may turn your head. Flexible hours and varied work are some of the top perks. Not only that, but you are also given full control of your earnings and are likely to make more than your employed counterparts in the same industry.

As a contractor, working at a variety of businesses will allow you to learn a variety of new skills which can make you a good asset to any company. Freelancers also generally enjoy a greater degree of job security, coupled with a better work: life balance. For more information about contracting and its benefits, you can check out our handy guide.

How to start contracting

Industry research

Knowing where to begin as a contractor can be difficult, and this is why research is so important. If you are looking to start contracting straight out of university, it is crucial that you have an understanding of your industry and whether there is an opportunity for freelancing. You should also have some understanding about what skills will need to be perfected to make you as in demand as possible.

It may be beneficial to reach out to recruitment agencies that specialise in your field to gain an understanding of the opportunities available to you and the necessary skills.

Gain relevant experience

Gaining relevant experience in your industry will increase your likelihood of attaining those contracts. Your CV will be your greatest ally, so it’s important to be thorough, up to date and to ensure that it showcases all of your experience.

Consider looking for work experience during university. This will help you to gain some necessary experience and you will have the chance to put those skills into practise.

Networking as a new contractor

Building a network of contacts during, or before you begin your contracting journey will be extremely beneficial to you. It may also be useful to keep in touch with contacts you make during work placements and reach out to any graduates who have chosen contracting. Having a supportive network can help to answer those questions and will also give you a head start when it comes to hunting for opportunities.

Help build up your network by keeping a look out for local business networking events in your area.

How to set up your limited company

Once you have decided that you want to pursue contracting, the most important step is to set up your company. Contracting through your own limited company is the most cost effective way, meaning you can enjoy more of your hard-earned money.

Registering your limited company could not be simpler:

Register your company

The first step in this process is to name your company, decide where this will be based and register it. To register your limited company, the following documentation will need to be sent to Companies House for a small fee:

Memorandum of Association 
This will outline the names and addresses of the company shareholders.

Articles of Association 
This outlines the director’s powers and information about any shareholder’s rights and the rules which your company must adhere to.

Form IN01 
This includes director details and information about any shareholders.

Once this has been accepted, you will receive a Certificate of Incorporation which will include your date of establishment and business ID number. You will need to keep this information safe in the event that you decide to sell the company.

Our guide to forming a limited company can tell you everything you need to know about limited company formations.

Form A Limited Company

Managing your finances as a contractor

As a limited company director, you will need to open a business bank account under your company name to ensure all finances are kept separate. This will also make submitting your taxes easier.

Business insurance must also be purchased. In the event that something goes wrong, you will need to be covered and as the limited company owner, you have sole responsibility. Most business insurance is inexpensive and will be deemed essential by the majority of your clients.

VAT is charged on most business transactions, and once your turnover reaches £83,000 annually, will be a requirement. However, you can voluntarily apply for VAT at any point before this. Many business owners choose to do this in anticipation, as it can often save time later on.

Once you have applied for VAT, you can charge an additional 20% on goods and services (known as output tax). You can also claim back 20% on goods and services (input tax).

Every three months you will be required to submit a VAT Return. This outlines the amount you have charged and how much you can reclaim.

You will also need to register for corporation tax. This is the tax on the amount left over after all business expenses (including salary) have been deducted. It’s crucial that you inform HMRC that you’re liable for Corporation Tax within the first three months of setting up your limited company. To do this, you will just need to complete form CT41G and return to HMRC.

The current ‘small companies rate’ for smaller businesses stands at 20% on profits up to £30,000. This will need to be paid annually in your corporation tax return (CT600).

Understanding IR35

IR35 is often the subject of confusion for new contractors, but it is easy enough to get to grips with. Simply, IR35 is a set of guidelines which outlines the tax which contractors are liable for. This legislation was first introduced to ensure individuals who are in charge of managing their finances were not avoiding paying tax by ‘disguised employment’. This describes instances where a worker would operate under a limited company to carry out similar duties as a permanent employee.

As a contractor, you will likely be liable to pay different amounts of tax based on the rates of your contracts, so your IR35 should be calculated at a different rate each time. Your status is based on a number of variables including liabilities and employee benefits, which makes you virtually indistinguishable to an employee from a tax standpoint.

IR35 can be difficult to navigate, so it may be worthwhile seeking advice from one of our accountants. Here at Clearsky, we offer our clients unlimited IR35 reviews of contracts, so there is no need to fear navigating your way through that difficult to understand legislation.

How can ClearSky help?

If you’re considering becoming a contractor post-graduation, we’re here to help. At ClearSky, we are dedicated to providing you with all of the support you need from that initial enquiry right through to assisting your everyday finance needs. Our dedicated specialists are always here to help, so you’re in good hands.

We’d love to hear from you. If you have any queries, you can reach us via our contact page, or on 0800 464 0407.