Thinking about contracting/freelance work, what are the main benefits and pitfalls between being self-employed and creating a limited company?
Cheers
Don't you have to become a limited company, and technically employ yourself?
Then the contracts are between company-to-company (so it's up to you to sort out tax, etc)
in a nutshell limited company status means you can pay less tax - especially if earning a lot - but the admin costs are higher
especially if using an accountant
also less exposure to risk if you go bankrupt as a limited company I believe
If it all goes tits up and you're self employed they'll take your house.
If you're a limited company you can just wind it up and start all over again.
HTH
Can you be VAT registered as a sole trader?
Limited company = Limited liability. This can be a good thing.
Can you be VAT registered as a sole trader?
yes
Seek prof advice. Will depend on what you are doing/ nature of the work and how much you expect to earn. I do some freelance consultancy stuff and am self employed for those purposes, no point being a Ltd co for what I do & earn from it.
Limited company can mean limited liability. But you may be required to give personnel guarantees, in which case you are still liable.
EDIT: just read the above properly - no comment needed 🙂
As for walking away if it goes tits up, there are rules about the behaviour of directors. Get advice because if it goes wrong it can get very messy. Whether sole trader or ltd.
OP, send me an email if you want. I'm a commerical lawyer.
Can give you a bit of general info re legal issues if you like (liability, formation process and requirements etc).
You'd be wise to take full legal advice, but I can give you some info to highlight the key things to consider.
It all depends on your customer/clients' expectations.
If you're trying to portray yourself as a big professional outfit, then sole trader, no VAT kind of gives the game away.
I have set up an Limited Liability Partnership (LLP) which looks professional, I registered for VAT which means my fuel is 20&% cheaper and it hardly costs anything to run if you can administer it yourself.
For most people limited liability means nothing in the real world. Nobody's going to lend you money if they can't get it back.
Don't think Limited liability helps contracting scum in the event of a tax investigation, as it's considered personal taxation avoidance, not company?
set up an offshore charity fund for "brooess in need", work as a volunteer only accepting donations.
...now I wonder if that would work?
Some customers (generally bigger organisations) have a problem hiring sole traders. This is because if the sole trader does not pay their national insurance HMRC can come after the customer for this. This is not the case with providing a service through a Ltd company.
Don't forget the limited liability is not just down to borrowing money. It can also limit your exposure to damages arising from work going wrong etc because of this some customers might insist on you being properly insured.
because of this some customers might insist on you being properly insured
I think "you" should insist on being properly insured! (not you personally bazzer)
I think "you" should insist on being properly insured! (not you personally bazzer)
I am insured but I can see why some people might take the view that their liability is limited so why bother.
TO be honest, in the present financial climate, the banks will be looking for personal guarantee's with any limited company. Pretty much the same as they would if you were self-employed. If it goes pear-shaped you'll lose your house/car/internal organs/dignity/will to live, whatever
HMRC treat everyone equally appallingly (unless you're Vodaphone, Phillip Green or George Osborne) so that's not an issue. They'll come in, sit in your office making you feel uncomfortable, audit your books with a nit-comb, while looking at you like your a kiddy-fiddler.
Get yourself a good accountant and you'll find yourself constantly saying "Is this legal? What? Really?" a lot, while staring at them in disbelief.
Hope that helps
Get yourself a good accountant
at what point does hiring an accountant make financial sense? Is there a threshold or is it down to personal circumstances? Let's say for example, a sole trader earning about 30k with minimal outgoings and expenses - could an accountant save you more than what they charge you?
p.s. sorry if that's a hi-jack
A decent accountant needn't be expensive. You'd be surprised. They do make your life a lot easier though. They know stuff you don't as its their job ie:
Can you claim VAT on train tickets?
What mileage rates can you legally claim for business car miles?
Can you claim VAT back on postage?
Can you claim for domestic bills if you work from home?
No, I didn't know either
Plus: You just hand them a load of receipts and invoices and get them to sort it all out for you. Have you ever spent a day(s) doing accounts? Nailing your own plums to a plank with a lump-hammer would be a preferable way to spend an afternoon
Also whippersnapper - I guarantee that a decent accountant, within 5 minutes of opening your books, will have found some way for you to save more than you're actually paying them.
I pay £1k to £2k for my accountant's services I think, separate tax returns being necessary for company and each director of course.
Get a recommendation for a local accountant and contact them, ask if they will meet with a view to answering your questions and perhaps getting your business.
+1 for what binners says above regarding good accountant. Also my ltd company is registered at accountant not my home address so HMRC won't knock on my door first if they want to investigate my company.
so HMRC won't knock on my door first if they want to investigate my company.
why? what have you been up to then?
😉
whippersnapper. If you have a good accountant you won't have minimal expenses and outgoings, their job is to point out what your company expenses could be. There are a whole load of things you can do with your accounts that you would never have even considered. i'm sure still worth it at 30k
cha****ng. If you have a ltd company at some point you will probably get investigated by the HMRC.
Perhaps, but only a small minority of companies are investigated in detail - according to my accountant anyway.
Which is another very good reason for paying an accountant to tell you if you're taking the mick in any area.
I'd rather keep it all within reasonable limits and live a quiet life myself. I do know people who have been probed though and it didn't sound very pleasant./
Cha****ng. If you're going for any length of time they'll come knocking at some point. Whats the saying? There only two things certain in life. Death and ....
They will then pull you up over the most minuscule and trivial of things. Its quite staggering. I got a severe telling off after they'd spent two days going through our accounts to discover I had inadvertently claimed the VAT back on some postage stamps (you can't apparently). It amounted to about 4 quid. You'd think I'd had the treasury off for millions the way they went on about.
Meanwhile, if you DO actually have the treasury off for millions, they'll more than likely give you a nighthood 🙄
Lol @ binners.
Blimey, that's news to me. Which of my 150 0dd customers would they try to squeeze the money out of?if the sole trader does not pay their national insurance HMRC can come after the customer for this. This is not the case with providing a service through a Ltd company.
Yes - get yourself some insurance against the chances of being investigated by the 'tax police'. Any investigations have to be paid for by you. I have heard of small business people going under (even when all accounts were above board) because of the fees charged for investigating years of old accounts.
i can remember being told by a ex workmate, he was a builder, screw over anyone you like, but never make a mistake with HMRC, they will get you.
He also mentioned being told that tax demands were never whole numbers, if in doubt the hmrc would make it an obscure number, the person under investigation is then more likely to hang themselves trying to prove the amount demanded is wrong. If the tax man asks for £100.00 to easy to deny and tell them to come back and prove it, now if they ask for £98.37 sounds more like they know something.
As an accountant and answering the OP:
A sole trader is liable for all debts of the business. A limited company is a seperate legal entity to the owners (shareholders) of the business. Directors of a limited company have a duty of care to the business and not their own interests. If the director operates the business to their own interest at the expense of it's creditors then they can be prosecuted. As pointed out by others if you are seeking credit you may be required to provide security until you have built up an history with them.
A limited company requires more reporting and hence an accountants cost will be higher. For the type of work you are describing I would quote you in the region of £120 company formation, £500-800 annual financial statements (depending on the state of your books, the better they are the less the charge) and £120 tax return (self assessment). We may offer a package that includes management accounts, VAT returns, payroll and annual financial statements for a set monthly fee depending on your requirements.
To clarify a few myths. A good accountant (and there are plenty of bad ones) will save you more in the long run than they charge you so long as you listen to their advice. Never go with an accountant just because they are local to you and if your choosen accountant can't help you understand your accounts and how they relate to your business then change to one who can help you build your business.
HMRC have done random investigations into sole traders and limited companies for the last two years, they no longer need a reason to enquire into a business. They can change the enquiry into investigation of a business and then move onto the owners. Investigations are normally not covered under the services provided by your accountant but they will offer you a 3rd party insurance cover to meet the costs of the accountant and other representation required to fight your case. This insurance will come with free expert professional advice covering tax to employment law so as to prevent you making bad decisions.
Accountants will not cook your books for so that you pay less tax, why should they be prosecuted for your benefit. They will use all their knowledge of the tax system to minimise your tax liability.
As an accountant and answering the OP:
phew!
I just emailed the OP a hefty note on the legals involved in forming a NewCo, and I had a stab at guessing how much an accountant would charge for prep of financial statements.......i guessed £500-£1,000.
Glad to see that i'm not completely out of touch with the startup end of the market! I've lost touch with reality recently after working alongside one of the big 4 whose bills we saw going to our mutual client were quite frankly ridiculous! And that's saying something coming from a corporate law firm!
Think they were struggling to fill their fee budget and decided to get it all in before the end of the financial year
😀
peterfile, could send me a copy, too, as I'm just going through the same process. email in profile. Cheers.
Glad to see that i'm not completely out of touch with the startup end of the market! I've lost touch with reality recently after working alongside one of the big 4 whose bills we saw going to our mutual client were quite frankly ridiculous! And that's saying something coming from a corporate law firm!
Quality of the service provided for the fee charged is shocking too.
nick, YGM
craig - i agree completely. On the advisory team we had 2 lawyers (myself included) and 5 from the finance side.
It was cringeworthy, we used to turn up to client meeting at our offices: 2 lawyers, 2 from client......and 5 from the numbers guys!!!!
How can you POSSIBLY justify sending 5 people to sit in a meeting. We had assumed that they weren't charging for all that time. But client was happy to have a whinge to us about it and noted that they were.
Needless to say, they've just been pulled off the second part of the transaction.
+1 to a lot of the above, but also consider the VAT FRS (fixed rate scheme), that way you pay VAT based upon a percentage (which depends on business type) of your turnover.
Don't need to account for VAT, and therefore don't really need to know the specific rules, plus can get back big items VAT too.
Plus I ask our accountants for the law, and then how far they advise to go 'near' it - then I decide what we should do.
Know what your market is and how much you can earn per day or per hour. Is there a good pipeline of work. If you have that info then go shopping for an accountant. The good ones will explain the whole scenario to you and enable you to make up your mind.
I recently went limited company and it might be very hard to convince me to take a permanent position with another employer again. Its all pretty good so far.
Is there a certain qualifying earning bracket/annual turnover where-upon it makes financial sense to switch from sole trader to Ltd liability?
monsta, speak to an advisor. There are alot of details, and alot of pros and cons to each.
rules about financial statements differ, liability differs, legal responsibilities differ, things like VAT are i believe irrelevant.
One of the biggest supposed benefits is that Ltd means you are no longer liable as the business is a legal entity in its own right and therefore responsible for its actions. But as director you still are responsable for some things.
And if you go to the bank they are going to want guarantees, if like a lot of companies yours is in no more than a phone, a desk and a few tools, there is nothing to act as security for a loan, so they will ask for directors guarantees, ie you, same as if you were a sole trader.
If you are earning above the annual tax allowance (I expect you will be)then they're significant tax savings that can be made.
In the example I gave above for a small limited company you're only increasing your accountancy fees by about £350 over a sole trader that requires annual accounts to be produced.
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If it all goes tits up and you're self employed they'll take your house.
Utter bollocks - they can't take a thing from you unless you have secured a loan or otherwise borrowed against it.
If you are self employed and forced into bankruptcy then they can liquidate your assets. They may not sell your tools used in your trade so you can carry on earning but may take your home if your debts are so big.
Utter bollocks - they can't take a thing from you unless you have secured a loan or otherwise borrowed against it.
Mastiles - see how much joy you'll get trying to get any line of business credit that's unsecured in the present climate. You've no chance fella
That isn't the point - if you don't have secured credit then the creditors can't take anything from you. Because you don't have anything secured against the loan.
I am not disputing how difficult getting unsecured credit is but you don't necessarily need credit to start up a business .
That isn't the point - if you don't have secured credit then the creditors can't take anything from you. Because you don't have anything secured against the loan.
OK, look at it this way:
Widgets Limited enters into a contract with a supplier. Supplier sues Widgets Limited for payment after it defaults. Widgets Limited can't pay it's debts so it is wound up and any cash/assets are used to pay the creditors. The shareholders in Widets Limited lose the value of paid up shares they owned (which could quite easily be £1).
John Smith (a sole trader) enters into a similar contract with a supplier. Supplier sues John Smith for payment after he defaults. Court makes an order against John Smith for payment of the amount he owes to the supplier. John has no cash because his business is failing, but oh look, he has a £350k detached house in Surrey which has no mortgage on it. Lawyers acting for the supplier are keen to enforce the order in favour of their client, so guess what they go after........
I see - you added 'no mortgage' to help your argument. Nice one.
I see - you added 'no mortgage' to help your argument. Nice one.
Jeez, stop being so obtuse.
Clearly, if you have a 100% mortgage then you have no assets worth chasing, so you'll just be declared bankrupt and never get so much as a mobile phone contract again.
OK, let's take a more realistic situation for your benefit.
John Smith has a house currently worth £350k with a £200k mortgage.
John Smith has a court order against him for £250k.
Lawyers acting for the supplier (and the court) are well aware that there is £150k of equity in John's house. John is unable to pay his debts and has a whopping order against him.
What do you think is going to happen?..................
At least John Smith is not producing that crappy "ale" any more so it's not all bad.
They are going to be shafted because they didn't secure the order against John's equity...
A creditor that has a secured loan on asset can't stop it been liquidated to pay off another creditor but only ensure that their loan is repaid in full first before the remainder is split between the unsecured creditors.
They are going to be shafted because they didn't secure the order against John's equity...
Really?
So you are of the opinion that there is absolutely no way of enforcing an order made by the court? Doesn't that sound a bit odd to you?
Orders aren't secured against anything. In this case, it's a declaration by the court that you owe someone else money and that you have to pay up.
If you don't pay up, the order can be enforced in a number of ways (warrant of execution, attachment of earnings, charge over your property etc).
Seriously, just think about it, if the court makes an order to the effect that you owe someone money, and you have the means to pay it, why shouldn't the creditor be able to enforce the order? It defeats the point of getting an order in the first place.
If I was acting for the creditor and it already had an order for payment of the debt, and the only way it was ever going to see it's cash was by the sale of the debtor's house, I'd apply to the court for a charge over the property and then wait until the house was sold, or if the creditor was in a hurry for payment, apply for an order for sale once it had secured the charge over the property. You're going to be next in line behind the mortgagor though.
*mortgagee
If you're mostly selling your time [contract/freelance] then liability issues are kind of a moot point.
The biggest advantage of going Ltd is the tax benefits - especially if you'd ordinarily be in the higher tax bracket.
Having been self employed and now being Ltd, I wouldn't entertain doing Ltd without an accountant.
If you're mostly selling your time [contract/freelance] then liability issues are kind of a moot point.
Not entirely (although it's certainly less than someone entering into lots of credit agreements with suppliers, for example setting up in retail).
What if, for example, you work in IT and are contracted by a company to set up a firewall and you make a really crap job of it and the company suffers a loss as a result of its network being down for 2 days (sorry for the rubbish example IT bods, not my field!).
As a sole trader, you personally are liable for that loss.
If the work was carried out by a limited company then you are only personally liable to the value of your paid up shareholding if things go up the swanny.
In addition, even if you are just selling time, surely there are still some circumstances where you enter into agreements for the supply/hire of good or services? What about equipment for work, or a car, or buying parts needed for a particular contract? All of these expose you (or your company) financially.
lawyers/accountants only ever sell time, but are exposed to eyewatering levels of potential liability. So you need to make sure you have robust PI cover in place, since if it doesn't pay out, you can say bye bye to your career and potentially your firm.
Probably worth chipping in to mention professional liability insurance at this point.
Hiscox are a good place to try. Surprisingly affordable for us.
True enough.Not entirely (although it's certainly less than someone entering into lots of credit agreements with suppliers, for example setting up in retail).
I use Hiscox for insurance too.
this is interesting and I was about to ask about liability insurance.
Craig - still getting things together and your posts on here are saving me asking questions at the moment but will be in touch 🙂
Am also thinking about going Limited as I will have to in order to apply for grants such as the Technology Strategy Board ones. Am currently a sole trader working as a subcontractor under another company (limited) so covered by their insurance (we extended it) and then will branch out my business.
No problems Andy, I hope it's all coming together for you. If you need further info have a look around our website too.