If you’re a freelancer or thinking about becoming one, you might be wondering how best to structure your business. Should you operate as a sole trader or set up a limited company? While each option has its pros and cons, forming a limited company could offer significant advantages for many freelancers. In this post, we’ll break down the key reasons why setting up as a limited company might be the right choice for your freelance business.
Tax Efficiency
Freelancers operating as sole traders pay income tax and national insurance on all their profits. But with a limited company, there are opportunities to reduce your tax burden.
Limited companies pay corporation tax on their profits, which is generally lower than income tax rates for individuals. You can also pay yourself a combination of salary and dividends. Dividends are taxed at a lower rate than income, potentially saving you significant money. In short, a limited company structure offers more flexibility in how you manage your income, allowing you to be more tax-efficient.
Limited Liability – Protect Your Personal Assets
Another big advantage of forming a limited company is protection from personal liability. When you operate as a sole trader, you and your business are considered the same legal entity. This means that if things go wrong, such as a legal claim or business debts, your personal assets (like your home or savings) could be at risk.
In contrast, a limited company is a separate legal entity. This means that if the business encounters financial difficulties, your personal assets are usually protected. Your liability is limited to what you invest in the company. This peace of mind alone can make a limited company worth considering.
Professional Image
Having a limited company can enhance your professional credibility. Many clients, especially larger businesses, prefer to work with companies rather than sole traders. Operating as a limited company signals that you take your business seriously and may make you more attractive to potential clients. It can also give your business a more established, professional image.
Opportunities for Growth
If you have plans to expand your freelance business, setting up as a limited company can provide a solid foundation for future growth. It’s easier to raise investment or bring on partners within a company structure. Plus, you’ll have a formal framework for separating your personal finances from your business, which can be useful if you want to take on larger contracts or hire employees in the future.
Better Access to Funding
Limited companies may find it easier to access financing and credit. Banks and other lenders tend to view limited companies as more stable and reliable than sole traders. Additionally, a limited company can issue shares, which means you can raise money from investors if needed, without taking on debt.
Pension Contributions and Benefits
As a limited company director, you have more flexibility when it comes to making pension contributions. Your company can contribute to your pension, which is a tax-efficient way of saving for retirement. These contributions are treated as a business expense, reducing the company’s taxable profits.
In addition, limited company directors can access other benefits, like private healthcare or company cars, which can be tax-efficient ways to reward yourself.
Increased Control Over Income
With a limited company, you have more control over how and when you pay yourself. You can choose to leave profits in the company to be drawn as dividends in a future tax year, which could help you manage your income more effectively and reduce your tax bill.
Succession Planning
If you want your business to continue without you one day, it’s easier to pass on a limited company than a sole trader business. A company can be sold or passed to a family member, giving you more options for future succession planning.
Things to Consider
While there are many benefits to setting up as a limited company, it’s not for everyone. There’s more paperwork involved, including filing annual accounts with Companies House and preparing corporation tax returns. However, these administrative tasks can be managed easily with the help of an accountant.
It’s also worth noting that if your income is relatively low, the tax benefits of running a limited company might not outweigh the administrative costs. In this case, operating as a sole trader could still be the better option.
Conclusion
For many freelancers, setting up as a limited company offers substantial benefits, from tax savings and limited liability to increased professionalism and growth potential. However, every business is unique, so it’s important to carefully consider your own circumstances and long-term goals before making a decision.
Are you unsure which business structure is right for you? Get in touch with us today, and we will be happy to discuss your options and help you find the best path for your freelance business. Please click here to book a consultation.
Disclaimer: This blog is accurate as of the publication date and is intended for general informational purposes only. It does not constitute legal or professional advice. Please seek independent professional advice.