Having decided to be your own boss, you have to do away with the job search and all the stress that employees undergo. This kind of thought brings out the entrepreneurial spirit in you. However, the decision is yours when it comes to the kind of business you want to go into. You can choose to set up a limited company or to register as a self-employed sole trader. Here are some questions you need to answer to help you with the kind of business that is best for you.
What industry will you be working in?
The industry you get into plays an important role in how clients view your business. In some industries, it`s very common for freelancers to be sole traders. On this basis, clients are usually very happy to deal with them. For instance, writers or artists may decide to form limited liability companies. Clients prefer to deal with bigger organisations that are registered. The main reason for this is due to their transparency as the details of the company is displayed publicly in the company house.
How much paperwork do you want to do?
Whether you are a sole trader and the owner of a Limited Company, or you are a director of a Limited company, you`ll have to complete a self-assessment tax return with HMRC every year. The difference is that there will be extra paperwork for the director of a Limited company. The penalties for wrong filing of paper work are usually higher for the directors of a company than it is for sole traders. Limited companies must produce Year End Accounts (also called statutory or annual accounts) and also send HMRC a Company Tax Return and Companies House an annual return.Both limited companies and sole traders must register for VAT if their estimate for annual takings is estimated to be up to £81,000 at the year.
How much responsibility do you want?
As a sole trader, you are entitled to all the profits as long as you have paid tax and National Insurance contributions. However, you are responsible for the losses your business incurs. For this reason, you might lose all your assets if you eventually run into debt.If you form a limited company, you will be taxed for any money you withdraw from the business. More so, you have to record what you want to use the money for (e.g. salary or loan). As a director, tax and both employee and employer`s NI contributions will be deducted from your salary by PAYE. This means that you`ll pay more NI this way than you would as a sole trader. However, the benefit is that your personal assets are all protected against any debts your business may incur. Again, your legal liability is limited as well.
How much money do you need?
It is much easier for a freelancer to work for a big organisation or apply for business loans if he chooses the limited liability route. The Limited company gives you an edge due to its legal and financial protection.
Don`t forget you can change your mind.
If your decision is to form a limited company, we can help you with that. You will receive a certificate of incorporation indicating the registration date and the company number.However, if you choose to be a sole trader, you will need to register for self assessment with HMRC by 5th October following the end of the tax year. Contact us if you need more advice or information on registering as a sole trader.It is very possible to shift to the structure that suits you if the nature of your work or that of the clients you hope to attract, changes.For more information on this matter and lots more tax and financial news, see Your Virtual Office London blog today!