Starting a Construction Company: Best Business Structures

When you decide to start a construction company one of the first things you’ll need to consider is your company structure. You’ll have a number of options open to you, including becoming a sole trader, signing under an umbrella company or starting your own construction company.

Each of these business structures has its own pros and cons and here we take a look at each option and what sets them apart.

Operating as a sole trader contractor in the construction industry

Starting a construction business as a sole trader is relatively simple and there’s less administration to take care of and no fees or costs involved. Although this is a common path for contractors in the construction industry, especially with the Government’s Construction Industry Scheme (CIS) deducting tax at source for subcontractors, it means that you could miss out on some tax-efficient benefits and could put your business in greater financial risk.

As a sole trader you own and run your business yourself and there’s no legal distinction between yourself and your business. Despite the name, you can still employ people, but you will be solely responsible for any debt that your business incurs and any act either by yourself or your employees in the course of company business.

The pros

  • Easier to set up, less statutory returns, and lower ongoing costs.
  • You can keep all the profits.
  • More flexible and a good option if a stop-gap employment solution.
  • VAT Flat Rate Scheme (if your turnover is less than £150,000 a year) makes admin easier.

The cons

  • Less tax efficient benefits.
  • You are personally liable for all business debts.
  • More difficult to get business loans.
  • No one else can take over your business if you are sick or you retire.

Setting up through an umbrella company in the construction industry

When you start your construction company under an umbrella company you are essentially becoming an employee of that company – you’ll submit time sheets to the company and in return, they will pay you under their PAYE scheme and you’ll be able to claim some business expenses through the company.

You will have to pay a fee to the umbrella company for their services and, with less tax efficiencies to take advantage of, your take home will typically be around 65% of contract values.

The pros

  • Easy to manage, with no paperwork other than your timesheets and expenses forms.
  • Your pay and the amount of tax taken from it are all calculated for you.
  • A good option if contracting is a short-term role, or if you aren’t yet sure if contracting is for you.
  • Ideal if your contracts amount to less than £25,000 a year.

The cons

  • An expensive way of working for contractors – you’ll pay full PAYE and National Insurance.
  • You are an employee of another company, so not working for yourself.
  • You’ll need to pay a fee for the umbrella company’s services.
  • There may be a delay on your pay while the umbrella company collects the money owed for your work.

Starting your own construction company

Starting a construction company for your contractor business can often make sense, especially when you take the tax benefits into consideration, for example, if you are earning over £150 a day and you have never been made bankrupt.

Being a limited company owner you could structure your finances so you take a smaller salary and pay the lower rate of income tax and National Insurance, and take the rest of your income as dividend payment. The dividend will still be taxable but at a lower rate and the typical contractor could take home around 85% of their contract values by setting up in this way.

You’ll also be able to claim your travel, clothing and tools to your company, rather than paying for them yourself.

The pros

  • Tax efficient, allowing you to take home around 85% of your contract values.
  • You won’t be personally liable for business debts.
  • Better credibility with both lenders and clients, allowing you to grow your business more easily.
  • VAT Flat Rate Scheme (if your turnover is less than £150,000 a year) makes admin easier.

The cons

  • More returns and reports to file means more admin and professional support may be needed.
  • Less flexible if you are not sure if contracting is for you for the long term.
  • Tax benefits aren’t as great if you earn under £150 a day.
  • Less control over profits.

Starting a construction company cost-effectively and time efficiently

While at first glance setting up a limited company may seem to be expensive and time-consuming, neither is true, especially if you use a formations agent such as The Formations Company. The starting price of formations packages can actually cost less than your Companies House registration fee (which is included in the package). Also, registering your company can also take as little as a working day.

We’ll need to know information including your new company name and address, your directors’ and secretary’s details, the share capital involved and your shareholders’ details. At The Formations Company, we’re on hand to provide help throughout the process. Our support team can be with you every step of the way. We’re available by phone, email or online live chat to make your formation as easy as possible.

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