Freelancers should choose which business structure that would like to follow depending on the type of business they run. Each business structure has their own legal, tax and liability issues which need to be taken into consideration when making your choice between a sole trader or a limited company. This guide will look at the most important points that should be considered when making this choice.
The choice on whether to trade as a sole trader or a limited company as a Freelancer will depend on the type of clients that you have. It is important to take this in to consideration as each business structure affects the way others perceive you. A number of scenarios will be examined highlighting which business structure would be most beneficial for the client type that you serve.
Working with individuals
If your clients are individuals necessitating specific services or products with high standards of delivery and customer service, then running your business as a sole trader is most beneficial. You will have less paperwork and setting up as a sole trader with HMRC is much simpler.
Working with larger clients
Large corporations normally only work with limited companies. Note that running a Limited Company requires much more paperwork and HMRC regulations need to be fulfilled timely and with diligence.
Working with clients in high risk environments
If your clients have high risk environments, for instance, a high risk of security or sensitive data, then a limited company is the most viable option. The most important factor being that it provides you with limited liability if anything goes wrong especially since an elevated risk already exists in the working environment.
Setting up as a Freelancer
The business structure you ultimately choose is not ever finite and can be changed at any time. If you start out as a sole trader but prefer to change your business structure to that of a limited company, a few simple steps are needed. The advice of an accountant should always be consulted before opening a Limited Company.
View our dedicated section on Freelancers
Setting up as a Sole Trader
To start trading as a sole trader, your need to contact HMRC and inform them that you are embarking as a Sole-Trader. You also need to register as self-employed. This can be done online and registering means that you will need to provide a self-assessment for each tax year.
View our dedicated section on Sole Traders
Setting up a Limited Company
This is a more complicated route with many more steps and paperwork. Firstly, register your limited company with Companies House who issue a certificate of incorporation, Articles of association and shares issued and specify who the company director and company secretary are.
View our company formations service
Choosing a Company Name
As a Sole trader you can use your individual name but as soon as you start a limited company, a registered name needs to be chosen. If you have been trading as a Sole Trader under a specific name, this needs to be registered with Companies House. This will ensure that this name is solely yours to use in your business. You may also want to consider registering your company’s online domain name to secure ownership.
As a Sole Trader income tax needs to be paid. The advantages corporation tax should however be viewed carefully if your business experiences high growth volumes.
A Sole trader should always ensure that no liabilities exist like large loans or other business commitments that pose any risk, as all the liability lies with you. If any type of business dealings occur where liability becomes an issue, than you should change your business structure to that of a Limited company. All personal liability is limited as the company, who is an entity of its own, accepts all liability hence protecting you.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.