You may be thinking of going freelance, and if so, well done. However, there are certain legal obligations and differences in how exactly you are going to do so. In the UK there are two main categories of self-employment, they both achieve different goals, and require different skill sets. Let’s take a look at which one will suit you the best.
This is the simplest option out there. Simply put, you are personally responsible for the company. This means that all of the comings and goings of daily business are under your name. Anything that happens is viewed as your sole responsibility. If for instance you are self-employed and you owe a large amount of business debts, you will be held personally liable. The resultant consequences could be personal bankruptcy. On the positive side, when it comes to the tax man, you only have to pay one lot of taxes, since it is all viewed as your personal income.
The way this is usually explained is thinking of a person. When you create a limited company, in the eyes of the law, the limited company is viewed as a person. Now this doesn’t mean that the company can vote, get married and adopt children, but it performs other roles. For instance, if you are running a limited company and the company has debts it cannot pay, the company will be made bankrupt. However, you as an individual will not, since you are viewed as an employee of the company.
These are the essential differences. There are more, and we will discover them in a moment. Let’s first look at which one you should choose?
This will suit you if you are providing a service with little to no liability or risk. For instance, if you are a personal tutor, or a contractor this will suit you. Anything that involves you providing a service, consulting, or freelancing with no buying and selling, most of the time this will be your choice
This is more for creating a business. If you are going to be buying and selling, potentially owing debts, or lending out on credit. If your business model has high overheads, high liabilities or is going to be in negative equity for periods of time, then register as a limited company. This will protect you if things go badly. Another case will be if your business grows to a large size. Even if your overheads are still low, if someone sues your company, or some other action is taken against it, then making it limited protects you.
What are the requirements of both methods?
Whatever you choose, it is important to remember what your new responsibilities entail. For instance, both require you to submit yearly tax returns. For self-employed people, it is the self-assessment form that needs to be filled, plus your national insurance contributions. It is often important to get these figures checked by an accountant before you submit, as inaccurate filings can lead to a fine, and you are personally responsible for it.
For a limited company it is more complicated. You will need to take care of corporation tax, staff tax, national insurance and all of this must be recorded in a very particular way. HMRC reserve the right to demand your records from you at any time. Any changes that occur in your company must also be documented and reported to HMRC.
It might sound like a lot, but don’t be put off. Often times, entrepreneurs realise that getting a little help by way of an accountant can alleviate much of the new pressure that is piled on them. In the first few years of your business, you will want to use all your energy to make sure the business succeeds, so getting help with the paperwork is a good idea.
So to recap, self employment and limited companies are the two ways to go in freelancing. Both require a little getting used to, so choose which is best for you and get going!
GM professional Accountants are specialist freelance Accountants in London.