How a Limited Company Works

Many freelancers choose to operate through their own limited company through which they contract their services to end hirers, enabling skills to be brought in for projects as needed.  This type of set up is often referred to as a personal service company, or PSC.

Limited companies are owned its shareholders and run by its directors, which can be the same individual.  The company is a legal entity with profits and losses belonging to the company, and the company is also liable for its debts.  That means the directors and shareholders are not personally liable, their liability it limited to paying the company what they have agreed to pay for their shares.

The limited company operates by entering into a contract with the firm for whom they are delivering services, and invoicing that firm on a regular basis, usually in arrears.  It is necessary to maintain full financial records, prepare tax returns, file information with Companies House, and understand risks under IR35 and other legislation.  There will need to be appropriate insurances in place to protect the assets of the business.

These responsibilities are more onerous than other ways of working but there are many advantages too, such as: control, greater income potential, limited liability, and professional perception.

Another option is to work as a sole trader, which is a less formal self-employed structure enabling business income to be generated and counted alongside any personal income.  However, this structure has less protection than a limited company because there is no separation between the business and the individual, therefore personal assets are at risk if anything goes wrong.

The legislation and compliance involved in running a company is complicated, so FCSA would always recommend seeking external accountancy and tax advice from a firm with experience in the freelance sector.