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

chapaking. 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./

Chapaking. 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.

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.

Blimey, that’s news to me. Which of my 150 0dd customers would they try to squeeze the money out of?

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.

For more details look here