Setting up as self-employed, you have several options available on how to manage and administer that business. One of the biggest choices you will need to make is whether to become a limited company. For many, the choice is a simple one, especially for freelancers: it is not worth the extra effort. However, it is not a clear-cut choice and there are advantages and disadvantages to registering as a business even with a lower turnover.
Tax is lower: When you establish yourself as a business, your personal tax burden is lower than opting to freelance without setting up a limited business. One advantage is an income workaround where you may take a tiny salary but pay yourself in the form of dividends. These are subject to a lower tax threshold. You may earn more money overall with a Limited Company.
Losses Limited to Business Assets: Most small businesses fail within the first two or three years of establishment. When you set up a business, any losses or debts are limited to the value of the business’ assets. There are some exceptions (such as fraud) but your home will not be at risk if the company runs up massive debts, unlike simply being self-employed.
Easier to Get Business Finance: Business loans, business credit cards, overdrafts – all of these things are easier to obtain when you set up a limited liability company. When you work as self-employed without a registered business, you will find it more difficult to apply for any credit card or loan, let alone those for your business.
A Business is a Distinct Entity: This is a little more abstract, but the presentation of a business as a distinct entity from you as a person presents a more professional image. When you have a registered business name, people will assume profitability and prestige of the company, even if this is not the case.
More Expense Allowances: You have greater leeway when claiming entertainment costs and hotel stays and less justification required when claiming them. Other things such as charitable donations are tax deductible; so is regular food and drink. If you employ multiple people, you can provide free food and make it tax deductible.
Disadvantages of Becoming a Limited Company
Corporation taxes: Although you will pay lower personal taxes, your business will be liable for corporation taxes. This is a tax on the profits of the business. What you could gain in personal tax allowance could go out the other hand to HMRC in the form of higher corporation taxes, assuming of course, that the company is profitable enough.
More costs: For a small business, these costs may be prohibitively expensive, especially in the beginning when you have little capital or assets. To set up a business name, it costs money. With a limited company, accounting is more complex and will be more expensive. This will mean hiring an accountant (either freelance or full time) with greater overall costs.
Complex administration: As well as requiring the services of an accountant, and the more complex nature of finance, you will find that amount of time and energy spent on administration is greater too. You will need to file annual accounts and, despite that it won’t take much more time than regular self-employed accounts, it is complicated.
Legal responsibility: When you are a sole trader, you are responsible only for your own income, costs and accounts. As a director of a business, you have duties other than the tasks for which your business is set up. You have a legal obligation to protect the business’ assets. Failure to act in the best interests of the business could see massive personal fines and even jail sentence.
Public accounts: The business is obliged to publish its accounts with Companies House, including tax statements and details on Corporation Tax. You also need to supply your public business’ address. If you are a sole trader operating under a business name, you may not wish this information to be public.