Many contractors or freelancers who may initially have been umbrella, or in some cases 'Sole Trader' may find that setting up a Limited Company can offer the best long term solution for a number of reasons. There are three types of these in the UK which are: Private Limited Company (Ltd); Public Limited Company (PLC) or a Community Interest Company (CIC). A CIC is a structure used for community organisations and PLCs allow you to sell shares to members of the public. Both are not relevant structures to contractors - so we will focus on a Ltd Company below.

The advantages of Limited Companies

The first significant advantage offered is that they are 'limited liability' structures. This means that the shareholders of the company are not liable for its debts should it fail. In the case of contractors and freelancers the shareholder is normally the individual contractor - though ownership can be split between different people including family members.

LTDs have an existence in law in their own right - registering them is a little like registering a birth! The company is responsible for its own debts, has its own bank account and applies for loans and finance in its own right.

Unlike sole traders, limited company profits are subject to corporation tax whereas a sole trader will pay personal tax on any profits. Payroll and PAYE systems are however required to be in place to pay employees (the contractor). In general it is advisable to have an accountancy firm to deal with this responsibility for the company.

Requirements for Limited Companies

A limited company will require at least one company director - anybody can fulfil this role as long as they are not an un-discharged bankrupt. One shareholder is required - a minimum requirement of one shareholder owning a share of £1.00 is all that is necessary and the shareholder can also be the director. The requirement for a company secretary is no longer in place for a limited company (only a PLC).

Three main documents will be required to set up a limited firm and these are as follows:

- The Certificate of Incorporation: This is the company's birth certificate and creates the company as a legal entity.

- The Memorandum of Association which includes the address of the company and defines what it will do; standard document templates are available to create this document.

- The Articles of Association which describe how the company will be run.

Who can set up a limited company?

Anybody can form one in the UK, regardless of their own nationality - remember the company becomes a legal entity in its own right. Any name can be used as long it is not already in use. They are registered in the UK at Companies House and the process is relatively straight forward and can be done by an individual. Many contractors choose to use the services of an accountant or company formation specialist to do this, however, as using an experienced professional can ensure that problems are not encountered later - important particularly in the complex area of tax responsibilities.

For the self-employed, tax can be a headache. Using an umbrella company or forming a limited company can be an efficient way to manage tax affairs, but ensuring you get the right structure for your business is essential.