Freelancing and contracting have become increasingly popular career paths for many professionals.
With the rise of the gig economy and the flexibility of remote work, more individuals are opting to work independently.
However, when setting up as a freelancer or contractor, it is essential to understand the various business structures and choose the one that best suits your needs and requirements.
We will explore the most suitable business structures for freelancers and contractors.
Sole traders – The simplest approach
For many freelancers and contractors, operating as a sole trader is often the simplest and most straightforward option.
As a sole trader, you will be running your own business as an individual which means you will have complete control over your business affairs.
You will be personally responsible for any debts incurred and your tax liabilities will be based on your personal Income Tax rates.
This business structure typically involves less paperwork and administration compared to other structures, making it an attractive option for those starting out with their business.
To become a sole trader, you will need to register with HM Revenue & Customs (HMRC) as self-employed and you will be required to submit an annual Self-Assessment tax return.
Limited company – Greater protection and tax efficiency
If you are looking for more protection from personal liability and potentially greater tax efficiency, you might consider setting up a limited company.
A limited company is a separate legal entity from its owner(s), providing you with limited liability for any company debts or legal actions.
As a director and shareholder of a limited company, you can pay yourself a salary and dividends, which may offer tax advantages compared to a sole trader’s income tax rates.
However, limited companies are subject to Corporation Tax, and you will need to submit annual accounts and a Confirmation Statement to Companies House, as well as register or persons of significant control. This information is publicly available via Companies House.
The administrative responsibilities are more significant compared to operating as a sole trader, but the increased protection and tax benefits may make it worth the effort for some freelancers and contractors.
Umbrella company – A convenient solution for short-term contractors
An umbrella company is a third-party organisation that acts as an intermediary between contractors and their clients or recruitment agencies.
If you chose to work through an umbrella company, you will effectively become an employee of the umbrella company, which will handle your tax and National Insurance contributions.
Umbrella companies can provide a convenient solution for short-term contractors who do not wish to deal with the administrative responsibilities of setting up and running a limited company.
However, it is important to note that you will likely be required to pay a fee to the umbrella company for their services and you will likely have less control over your business affairs compared to other structures.
When deciding which business structure is best for you as a freelancer or contractor, it is crucial to weigh the benefits and drawbacks of each option.
Before deciding, consider consulting with a solicitor to discuss your individual circumstances and ensure you are selecting the most suitable structure for your freelance or contracting career.
Contact us today for advice on the best structure for you and your business.