The Alliance of Contractors Ltd

I had a call from a friend who wanted advice on the best structure to use for contracting with half a dozen other like minded contractors.

As independent IT contractors they were finding that larger organisations and government departments prefer to deal with contracting companies and outsourcing companies, rather than individuals (even if the individuals have their own company). As experienced contractors usually able to find their own work, they didn’t want to have to work through head hunters for specific contracts.

I suggested forming a limited liability company (details on our resources page, do it yourself for NZD $160) with each contractor as an equal shareholder. The company would be GST registered on an invoice basis with each contractor billing his/her time to the end client through the company and in the company name. At the same time the invoice for the client is raised they would raise an invoice to Alliance of Contractors Ltd for the same amount, or perhaps a fraction less to leave something in the company to cover the minimal running costs. With GST on an invoice basis and the ins and outs about the same dollar and date wise most GST returns would be almost nil.

Actual payment to the contractor wouldn’t happen until the client paid the Alliance first.

So all the Alliance of Contractors Ltd has to do is operate a bank account, raise invoices and do GST returns every couple of months, and annually one return to the companies office and a set of financial statements and a tax return for the company.

For this Xero is perfect. Everyone can have a login and create their own accounts receivable invoices to their client, and accounts payable invoices to themselves, and as long as someone reconciles transactions the GST return will be automagically ready whenever needed. At the end of the financial year all the information need to prepare the annual accounts is in Xero.

While they are at it they may as well have a domain name ($21.50 for a from 1st Domains) and email and website for that domain (free with Google Apps for up to 10 users). There are all sorts of other opportunities too – the Alliance of Contractors Ltd could have the public liability and professional indemnity insurance policy rather than individual contractors each needing a policy.

Assuming that the Alliance wisely gets an accountant involved in the year end work, all up the cost for running the Alliance for a year (Xero, domain name, accounting fee) should be less than $2000 plus GST.  Cheap at twice the price.