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Regardless of whether you’re an aspirational fledgling freelancer or a seasoned pro, it’s worthwhile weighing up the pros and cons associated with all of the business structures available to you. Starting out , many freelancers opt for the sole trader option, but that’s not to say that incorporation might not suit you and your business from day dot. Every situation is different.
More often than not though you’ll find that the incorporators are the more experienced freelancers, those a little more established who’ve been on the scene a few years and have the battle scars to prove it. Eager to grasp the benefits trading as a limited company provides, switching from sole trader to limited status is a step many a freelancer takes.
Why would a freelancer want to be limited company then, and what benefits can it bring?
Incorporating brings the benefit of limited liability, meaning that if your company goes bust, your personal property can’t be touched. Your maximum losses can only be what you put into the company in the first place, so you’ll only lose what you invested…a comforting thought in Osborne’s age of austerity.
Certain clients – large corporates and those in the financial sector especially – will find dealing with limited companies more attractive. When it comes to payment time it’ll purely be a business transaction at their end and they’ll avoid the muddy waters of PAYE and National Insurance contributions. When you’re a limited company, buying your services is no different for your client than buying a new printer – it’s purely business.
As a sole trader, once you get into the higher echelons of earning you could see a significant chunk of your take-home pay being whisked away by the tax man, as Income Tax and National Insurance contributions will be payed on everything you earn.
In contrast, by operating through a limited company you’ll pay corporation tax of 20% (assuming your profits are less than £300,000), and you can pay yourself through a combination of low wage (to minimise your PAYE and NIC outgoings) and dividends. This will result in less of your money going to HMRC, and more of it in your pocket.
This might not mean a lot the way the banks are acting, but unlike a sole trader, a limited company can establish their own credit rating against which to borrow money.
Additionally, you can issue shares in your company as a method of raising funds – essentially selling part of your business at an agreed price.
A limited company is its own legal entity, so should you wish to sell up and move somewhere sunnier you can flog your entire business – clients, equipment and all. For the sole traders this can be more problematic, as typically the equipment used is owned by them personally, and many elements of the business will be tied to their specific identity.
If you ask most people how you would go about forming a limited company, they’ll probably stare at you blankly. A common misconception is that incorporating is some kind of bureaucratic obstacle course that can take months and cost thousands of pounds. In fact, you can incorporate online for less than £15 in about ten minutes.
Ultimately then, going limited could take your freelancing career to the next level. Equally though, it can give you more HMRC-related strife. This is as running a limited company there’s additional duties that you, as a director, must perform. These are known as the Director’s Fiduciary Responsibilities.
This comes in the shape of extra paperwork; Annual accounts, Corporation Tax Return, potential VAT Returns etc. so if you’re paperwork averse, these added responsibilities are something that’s worth bearing in mind. A good accountant can deal with this sort of stuff for you though, so don’t let that put you off.
There are advantages and disadvantages to each approach, particularly when it comes to tax issues. Here's what you need to know!
While changes to dividend allowance & VAT Flat Rate Scheme have increased the tax burden for many a limited company director, the picture is still positive.