Becoming a freelancer – setting up a limited company

When making the decision to become a freelancer, you have two options. You can either set up as a sole trader or start a limited company.

Both options come with their own unique opportunities and challenges that need to be carefully considered before a decision is made.

For many, the advantages of a limited company work better for them and their freelance career.

Perks of starting a limited company

  • Limited liability: The most significant advantage of a limited company is the protection of personal assets. As a separate legal entity, the company’s financial liabilities are separate from your personal finances. This protection provides peace of mind, especially in industries where there is a higher risk of legal disputes or financial liabilities.
  • Tax advantages: Operating through a limited company can be more tax-efficient, particularly for higher earners. The Corporation Tax rate is generally lower than the higher personal Income Tax rates. Additionally, drawing income as dividends can be more tax-efficient than a salary, providing opportunities for strategic tax planning.
  • Corporate image: A limited company often presents a more professional image, which can be beneficial in attracting clients, especially larger corporate clients. This perception can lead to more business opportunities and potentially higher rates of pay.

Drawbacks of starting a limited company

  • Complex setup: Setting up a limited company involves a lot of steps. You need to register with Companies House, which includes choosing a company name, preparing documents like the memorandum and articles of association, and understanding the legal responsibilities of being a company director.
  • Increased administration: Running a limited company comes with more administrative responsibilities. You are required to file annual accounts, a confirmation statement, and deal with corporate tax affairs. This increased paperwork can be time-consuming and may require the assistance of an accountant.
  • Public disclosure: A limited company must disclose certain information to the public. Details such as director names, registered office addresses, and annual accounts are accessible through Companies House. This lack of privacy can be a drawback for those who prefer to keep their business details confidential.

Other considerations

As well as the above-mentioned pros and cons, there are other things to consider before choosing to start a limited company.

The way that you pay tax will be in two different ways – Corporation Tax will be paid on profits, and any salary or dividends that you take are subject to personal tax. This is often beneficial if you have a larger income, as Corporation Tax rates are generally lower than the higher rates of Income Tax.

You may also need to consider VAT, as VAT registration is mandatory if your turnover exceeds £85,000.

However, registering voluntarily before that threshold can have advantages, such as reclaiming VAT on business expenses.

You must also be stringent about keeping records of your company’s finances to comply with your reporting requirements.

Whilst you can keep your own records, many opt for an outsourced accounting professional to organise it for them.

If you would like help setting up finances for your limited company, get in touch with one of our experts today.