The Young & Viral's Freelancer Code - Chaper 1 - Incorporating

Freelancing is a work of art, and most of the times that doesn’t go hand in hand with taxes and legal stuff, this is why for most of us the self-employed vs LTD debate is a mystery often left unsolved. However, trading under the right business model and doing your taxes is undoubtedly part of the job. If you don’t have an accountant or legal adviser that can help you with this decision, here is a quick and digestible freelancer guide on how to finally solve the BIG question:

To incorporate or not incorporate?

Self-Employed Freelancer - The Basics

When you venture out of employment and decide to start working for yourself as a freelancer, you automatically become a sole trader, even if you haven’t told the taxman that you are doing so. This is HMRC’s definition of a sole trader:

“If you’re a sole trader, you run your own business as an individual and are self-employed.”

In order to become a LTD you will need to incorporate your company with Company House and become the director of it. You will normally set up a limited company by shares, and here is how HMRC defines it:

“A private company limited by shares is owned by its members (called shareholders). Each member’s liable for the original value of the shares they were issued but didn’t pay for.”

Don’t worry, it’s less complicated than it sounds. If you are working alone, as a freelancer, you will be the director and shareholder of your LTD company.

In other words, the difference between being a sole trader or LTD is how you want to trade in terms of both taxes and status in the market place. As a sole trader, you will use your own name and trade as an individual, whilst as a LTD you can choose a different name, and trade as a company.

Why Incorporate?

I am a firm believer that becoming a LTD is the best choice for freelancing. Here are a few facts that helped me made my mind up, and will hopefully give you some clarity:

• Tax savings - With a limited company you pay tax after expenses (from your profits) whilst as a sole trader you pay tax before expenses.

• Branding - Trading as an LTD will help to improve the perception that the public has about your work, and possibly lead to better projects and higher rates.

• Limited Liability - Since an LTD is its own entity, and you are only acting as the director, you have limited to no liability to debts and legal action. Unless you have personally guaranteed a loan, if your business can’t pay it anymore, only company assets come under the liability to the creditor. This way, you own possessions (house, car) are protected.

Why Not Incorporate?

• Accountancy Fees - One drawback to setting up a limited company is the slightly more complicated forms to declare your earnings. For this reason, if you are using an accountant, you will be paying higher fees for a limited company compared to a sole trader.

• Regulations - The regulations for a limited company are more complex, and the penalties are higher if you miss any deadlines. Here you can find more information about your responsibilities as a director when you incorporate your own company.

• Taking Money Out - When you are a sole trader you can take money out of your company as you please, but as a limited company you know have to take payments out as a salary. This only counts for money you want to spend on personal matters, as all expenses can go through the company accounts. Here is more information on how to take money out of a limited company.

The Bigger Picture

If you are just starting out your freelancing journey, running a limited company might overwhelm you. That is normal, especially if you don’t have an accountant and plan to do the bookkeeping yourself. However, whilst a limited company might seem like more work today, it will really serve you on the long run.

The main reason why a limited company is better comes from the way you pay your taxes. When you are earning a substantial amount with your freelancing, you will probably want to avoid paying most of that to NI and Income Tax. A limited company only pays corporation tax on profits, 9 months after the accounting period ended. Read more about corporation tax on the Company house website here.

Please be aware that depending on how much money you take out as a director, you might be liable to pay tax on your salary as well. Here you can find more information about ways to take money out and what responsibilities/regulations come with that.

A limited company is also great if you are planning to expand. You can always bring in more directors, employees and even get business loans.

How To Incorporate

If so far everything is looking great to you, and you want to become a LTD even if it might be a take a bit more work at the beginning, here is how to do it:

1. Decide on a name and check if it is available here. Make sure your name is valid, so read this carefully before you go ahead with your incorporation
2. Decide on an address for your company (this can be your residential address)
3. Decide if you are doing this alone, and you are the only director and shareholder, or if you have a secretary etc.
4. Go to Company House and register your company*

*It will cost you around £15. 

Read more about running a limited company here. If you want to talk to some about this (free of charge) you can call Company House at 0303 123 4500 (between 8-5, Mon-Fri) or HMRC at 0300 200 3410 (between 8-6, Mon-Fri).

What Now?

After you incorporated, here are a few things that you need to do:

1. Open a business bank account (it’s a requirement)
2. Check the requirements for business insurance (it depends on your business model)
3. Set up for corporation tax (tell HMRC that you are trading) within 3 months of starting any business activity. Find out a complete guide on how to do that here
4. Take note of the important dates (when you need to do your annual returns. when you need to pay corporation tax, etc.). You can also set up email reminders on your Company House account, and they will send you an email in due time notifying you in advance on anything you have to complete/declare*
5. Take note of your company number, as you might need to use it on invoices, to open a bank account and any other formal actions/documents for your company
6. Start trading!

Do you want to be a self-employed freelancer or incorporate as an LTD company? What are your short-term and long-term goals? Based on the answer to these questions and the guide above, you should be able to make an informed decision on what business model is best for your freelance career.

Don’t forget to leave a comment below and tell us what choice you made and any advice you want to add to the guide.