Once you’ve made the important decision to become your own boss, you’ll have to think about what legal and tax structure would be best for you and your business.
There’s no one-size-fits-all solution – it will completely depend on your personal situation and plans for the future. Don’t panic though, as help is at hand!
We’ve created this handy guide to outline your options and what they all mean.
A limited company is one of the most popular set ups, mainly due to its limited liability status – hence the name. Put simply, it means that your personal and business assets are viewed separately – so your own finances won’t be at risk if something goes wrong.
To set up your business, you’ll need to go through the incorporation procedure. You’ll also get to name your company – often considered to be the most fun part of the start up process.
Any profits generated belong to the company itself. If you want to withdraw funds, you’ll pay yourself a salary or dividend. You can also pay out a combination of the two to reduce your tax and National Insurance liability.
You’d also need to pay Corporation Tax (19% for the current tax year) on your profits, which is charged after paying your salary and various allowable expenses, but before dividends are issued. It’s a good idea to seek specialist advice about all of this – something we can help with.
Finally, you’ll need to consider IR35 before issuing dividends – as this will affect the amount of tax and National Insurance you should pay.
For more information about limited companies, read our limited company guide.
Limited liability partnership
This is legally similar to a limited company, and is run in the same way expect when it comes to tax.
At least two partners must be named as 'designated members', and are responsible for filing annual accounts.
Partners will still have the limited liability, administrative and statutory requirements of a company, but not the tax and National Insurance flexibility.
This is the simplest and cheapest way to trade. All you need to do is register as self-employed with HMRC and you’re good to go – it’s that straightforward!
As a sole trader, you’ll need to prepare accounts each year, which will decide how you pay tax and National Insurance. Any profits will automatically be yours to spend however you want, as there are no other shareholders to take care of.
The most crucial aspect of operating as a sole trader is that your personal and business assets aren’t classed separately. This means your personal finances could be at risk if something goes wrong.
In addition, some agencies may not deal with sole traders, so you think about how you’ll source your assignments before making your decision.
Find out more about running your business as a sole trader in our Limited Company or Sole Trader guide.
A partnership is simply an extension of the sole trader model, and involves two or more people coming together to pool their clients, resources and business contacts. The partners will agree to share profits in pre-agreed percentages.
They will also be required to choose a ‘nominated partner’ to be responsible for managing their tax returns and keeping business records.
Before setting up your partnership, it’s a good idea to draw up a Partnership Agreement with ground rules about how the business will operate and how its members will work together. You don’t want any disagreements further down the line!
Partners are taxed in the same way as a sole trader, but only on their share of the profits. Like sole traders, individuals involved in partnerships are jointly and personally responsible for debts. If certain partners are unable to pay their share, this responsibility will transfer to the others.
You may also find it difficult to source work through an agency, so it’s important to bear this in mind before making your decision.
Need more help?
We hope we’ve managed to shed some light on the different business structure you can consider. If you need any more help, or just a bit of guidance on which option is right for you, we’re here to help.
We’ll give you the best advice based on your own personal circumstances – giving you peace of mind that you’re making the right decision.
At ClearSky Contractor Accounting, we’re committed to being with you all the way through your career, from the incorporation process and beyond. We understand a contractor’s WorkStyle isn’t just 9-5, so neither are we. That’s why you can access our online portal any time day or night, whenever’s convenient for you. You can also give us a call during our extended office hours.