When people choose to embark on a freelance career, one of the first and most difficult decisions they will face is whether to be a sole trader or limited company. Setting up a limited company will limit their liability for business debts, but being a sole trader is usually simpler. The choice of being a sole trader or limited company will also affect a number of legal and financial issues.
Setting up a limited company is more complicated than registering as a sole trader. For this reason, many freelancers choose to stick with sole trader status as a simple way to begin working for themselves.
Setting yourself up as a sole trader is as simple as contacting HMRC or using an online form to register for annual self-assessment. Setting up a limited company, on the other hand, is a more complicated process. You must register your company with Companies House, and receive confirmation in the form of a Certificate of Incorporation.
Tax and Finance Issues
The choice of whether to operate as a sole trader or limited company will affect the amount of tax you pay and the way in which you pay it. Setting up a limited company will mean paying corporation tax. There will also be added complications surrounding some financial matters, such as the fact that any money you take from the business must be formally recorded as a salary or dividend.
Generally, whether the added administration and the move to corporation tax is beneficial depends on income levels and a range of other factors. In order to find out whether setting up a limited company will be an advantage or disadvantage from a purely financial standpoint, it is best to seek further advice.
Working With Clients.
In many cases, setting up a limited company can improve your profile in the eyes of potential clients. Trading as a limited company will often be seen as a sign of greater reliability than working as a sole trader. If you feel this may apply to clients in your industry, then registering as a limited company could help you to win more clients.
Another factor to consider when it comes to working with clients is the level of financial risk. If you are working with companies where there is a high degree of risk, for example if you make an important mistake that will be costly to put right or compensate them for, you will probably be better off trading as a limited company. This will limit your personal liability for any debts incurred by the company. For people working in high-risk areas, the decision about whether to function as a sole trader or limited company can be settled by this single factor.