Do I become a sole trader or set up a limited company?
When starting out on your own as an independent consultant, it can feel like a leap into the unknown and from a financial perspective, being independent has many perks but it does necessitate some discipline and responsibility.
Luckily in the UK, becoming a freelancer is fairly straightforward. The UK is reputed as one of the best places to do business and become an entrepreneur. In 2018, the UK was ranked 1st as the best country for doing business in Forbes magazine.
Deciding between self employment and setting up a company.
Setting up as a limited company is becoming more and more popular for contractors for a number of reasons, but first it is important to know what the difference is. When you become a sole trader, you are self-employed and the business or “job” you are doing is tied directly to you and you are individually liable for anything that goes wrong! When you deliver your consulting services through a limited company, the business of consulting is the business of a limited company and you own the shares. The benefits of setting up your salesforce freelancer business this way can be found in the ‘limited’ which is shorthand for limited liability. This means you, the director and shareholder, are not personally liable for when things go wrong.If you want to understand how the tax works in both scenarios, get in touch!
"Let's talk about the things that can go wrong!"
|Risk||Worst Case Scenario as a Sole Trader||Worst Case Scenario as a Ltd Company|
|Dispute with a client over project delivery and you must refund £30,000||You need to pay it out of your own pocket – personal finances at risk.||If the company can’t pay it can go bust without you putting your personal finances at risk.|
|IR35 – A boring but important piece of regulation (esp. for large corporates).||Harder for big companies to comply with IR35 because of the defining scope and means of employment rule.||Much easier to establish that the freelancer is “defining the scope and means of employment”.|
|Borrowing||More likely to use your house for security.||Less likely to use your house for security.|
|Hiring||You can employ people as a sole trader, but again if disputes occur, you’re liable for damages.||Liability with the company, means you are not personally liable for damages.|
We’ve given the sole trader route a bit of bashing. There are benefits going self-employed generally, but given contract sizes for projects will tend to be larger and lower volume than a product business, a limited company might be a better option when starting out. Setting up a limited company might be a little more admin but we believe it is generally worth it from a risk perspective.