One of the first big decisions that a contractor has to make when leaving the world of full-time employment is whether or not to form a limited company, contract via an umbrella company or become a sole trader. For now, we’ll look at the first two options as the right and wrongs of each have become a point of heated debate over recent years.
What we’ll aim to achieve here is an analysis of the perceived advantages and disadvantages of each. Ultimately, there is no concrete right option, just the option that’s best suited to you and your requirements.
(It also pays to keep in mind that umbrella companies will naturally vary in their standard of service, whilst running a limited company can be a pain without a suitable accounting solution.)
Advantages of running a limited company:
* Gives you more take home pay as it’s more tax efficient than working under an umbrella company. You can pay yourself a combination of salary and dividends.
* Having a limited company can give you more clout with clients.
* With new online accounting software, running a limited company can be much easier than previously perceived. Especially if your accountancy service also includes unlimited access to actual accountants (like Crunch does!).
* Get complete control over your business operations without having to rely on intermediaries to get your pay right. That means no more reliance on a payroll department!
Advantages of contracting via an umbrella company:
* Can be a very easy way of contracting as it leaves you without any accounting responsibilities (apart from sending in timesheets).
* No personal liability or tax concerns.
* Can be very useful for one-off short-term contracts as it saves you the hassle of forming and then dismantling a limited company.
Disadvantages of running a limited company:
* In the wrong hands it can be a tiresome and time-consuming process.
* The cost of doing your accounting can vary greatly. If for example, you pay for an online system to input your invoices, calculate VAT and enter expenses etc, you may then have to hire an accountant seperately. These costs can be substantial – unless you purchase an all-in-one package.
* Finding a good accountant can be a hard task.
Disadvantages of contracting via an umbrella company:
* Your take home pay is significantly reduced as you have to pay for the privilege. Remember: umbrella companies have to make a profit!
* It’s far less tax efficient than running a limited company – further reducing your take home pay.
* Umbrella companies can take away some of your independence due to the overlap between client, umbrella and you the contractor.
* There can be a delay in receiving payment as it gets processed by a third party.
* As a contractor, or freelancer, you can’t claim to be running your own independent business.
The state of the market today
The rights and wrongs of running a limited company or contracting via an umbrella company are not always clear cut. In the right hands, operating a limited company can be very very easy. Conversely, it could be a nightmare if, for example, you’ve got a pricey accountant who charges by the minute and is difficult to get in touch with.
At Crunch, we believe that running a limited company needn’t be a strain. That’s why we revolutionised the accounting industry by combining automative online accounting software with actual accountants for every single Crunch customer. We make everything transparent and all the accounting processes simple.
If you don’t believe us, read what freelance designer Alessandra Prati has to say about switching from an umbrella to a limited company account with Crunch.