Photo by <a href="https://burst.shopify.com/@josesilva?utm_campaign=photo_credit&utm_content=Free+Woman+By+Encouraging+Poster+Image%3A+Browse+1000s+of+Pics&utm_medium=referral&utm_source=credit"/>Jose Silva from <a href="https://burst.shopify.com/books?utm_campaign=photo_credit&utm_content=Free+Woman+By+Encouraging+Poster+Image%3A+Browse+1000s+of+Pics&utm_medium=referral&utm_source=credit">Burst</a>‘></p>
<p>When you first set up as a freelancer, one of the things you need to decide is whether to register as a sole trader or a limited company. So how do you decide?</p>
<p>We’ve teamed up with <a href="https://getcoconut.com/creative-boom/?utm_source=referral_creativeboom&utm_medium=referral&utm_campaign=sole_trader_limited_company">Coconut</a> – the current account for freelancers and self-employed people – to explain the main points you need to consider, in plain English, to help you reach an informed decision.</p>
<h2>What’s the difference?</h2>
<p>In essence, being a sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.</p>
<p>One of the biggest advantages of being a sole trader is that it’s simpler to register and involves far fewer administrative and tax headaches on a day-to-day and month-by-month basis. There are no setup costs, and your accountancy fees will be much smaller than if you were a limited company.</p>
<p>But while operating as a limited company does mean an extra workload and higher accountancy fees (unless you consider using something like <a href="https://getcoconut.com/creative-boom/?utm_source=referral_creativeboom&utm_medium=referral&utm_campaign=sole_trader_limited_company">Coconut</a> – more on this later), it also brings potentially bigger tax benefits in its wake. It also protects your assets against company debts, which means that whatever goes wrong with your business, you won’t lose your house because of it.</p>
<p>And perhaps most importantly, it opens you up to working with the many clients who will only employ freelancers who operate as limited companies. Many freelancers in the creative industries move to become a limited company for precisely this reason.</p>
<p>Let’s now look at what this actually looks in practice, in terms of registering as both a sole trader and a limited company.</p>
<h2>How to be a sole trader</h2>
<p>Being a sole trader is the simplest way to operate as a freelancer and involves the lowest accountancy costs and the highest degree of privacy. For this reason, most creative freelancers tend to operate as sole traders, particularly when they first go self-employed.</p>
<p>Technically speaking, being a sole trader means you’re personally responsible for any losses your business makes. In practice, as a freelance illustrator or graphic designer that’s unlikely to have any impact on you, as it’s unlikely you’ll spend significant amounts of money beyond your normal working expenses, such as your laptop and travel.</p>
<p>You need to register as a sole trader with HM Revenue & Customs (HMRC). You can do this online at <a href="https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed">gov.uk</a>, or you can ask your accountant to do this for you. Either way, it’s pretty straightforward, although you will have to wait up to 10 days to get an activation code, so it needs to be done well in advance of the date you submit your tax return.</p>
<p>As a sole trader, you must submit one tax return a year, as well as keeping records of your business income and expenses. And that’s not a task to be taken lightly: just because you’re employing an accountant, don’t assume you can just chuck a box of random receipts and bank statements at them and expect them to do all the work.</p>
<p>Nice as that might sound though, every accountant in the real world will expect you to prepare proper records, although a good one will, of course, offer help and guidance on how to do this.</p>
<p>As a sole trader, you have the choice of using traditional accounting methods, where you record income and expenses by the date you invoiced or were billed, or by cash-based accounting methods, where you only enter amounts when you actually get paid or pay a bill. There are pros and cons to each, but the important thing is to keep things consistent, or you’ll get into a real mess.</p>
<p>To make life easier and keep accountancy costs down, you could use <a href="https://getcoconut.com/creative-boom/?utm_source=referral_creativeboom&utm_medium=referral&utm_campaign=sole_trader_limited_company">Coconut</a>. It automatically categorises all of your expenses and then offers an option to download your data in a format that will be appropriate for both HMRC and an accountant. In addition to this, they are always on hand to offer any advice you might need.</p>
<h2>How to be a limited company</h2>
<p>As a creative freelancer, you may encounter companies who will only commission you as a limited company. In practice, this is the most common reason to register as a limited company, although there are also potential benefits to you in terms of tax, and in general, it makes you look more professional in the eyes of clients and collaborators.</p>
<p>A general rule of thumb is that the more you earn, the more the tax benefits of being a limited company are going to outweigh the accountancy costs. (Although if you use<br />
<a href="https://getcoconut.com/creative-boom/?utm_source=referral_creativeboom&utm_medium=referral&utm_campaign=sole_trader_limited_company">Coconut</a>, it adds an element of automation to your accounting by managing your expenses and offering useful tools like receipt capture. This then makes preparing your tax return far easier, potentially reducing accountancy fees.)</p>
<p>That said, it does get very complex, and bear in mind that recent tax changes have reduced the tax benefits of being a limited company for some. So from a financial standpoint, this is a decision that is best made on a case-by-case basis, in discussion with a reliable accountant.</p>
<p>The other important thing to understand about operating as a limited company is that the company is a separate legal entity, with separate finances from your own personal finances. On the plus side, this means your personal possessions are at no risk if debts are incurred by the company. On the minus side, if privacy is important to you, bear in mind that you’ll have to file your accounts at Companies House each year, so they’ll be a matter of public record.</p>
<p>Most importantly, because your company is a separate legal entity, you can’t just stick the money your client pays you straight into your own personal bank account, as you would if you were a sole trader. Instead, you have to take money “out of the business” through a mixture of salary and dividends. So you’ll need to do some tax planning to figure out the optimal levels for each, something that accountants will normally advise on.</p>
<p>You can register as a limited company either by post or online at <a href="https://www.gov.uk/limited-company-formation/register-your-company">gov.uk</a>. You can do this yourself, but it’s best to get help from your accountant to make sure you don’t miss any small details that might come to haunt you further down the line.</p>
<p>You’ll need to provide details including a company name, which must not be an existing company’s name or registered trademark. You’ll need a company address, which must be a physical address in the UK, or in the same country, your company is registered in if different, although it can be a PO Box address.</p>
<p>After you’ve registered your company with Companies House, you’ll need to register it for Corporation Tax, within three months of starting to do business. You then need to start filing Corporate Tax Returns, as well as the self-assessment returns that both sole traders and limited companies have to submit.</p>
<h2>How to decide</h2>
<p>Still unsure about whether to be a sole trader or limited company? Then it’s probably worth consulting with freelance friends and colleagues too, just to get their own personal perspectives and experiences.</p>
<p>That said, don’t necessarily swallow their advice whole. Everyone’s different, whether we’re talking about their finances or their tolerance of paperwork, and we all like to retro-justify our decisions, even if we know deep down they were the wrong ones!</p>
<p>Ultimately, this decision is one best made by sitting down with your accountant, crunching the numbers, and being realistic about how the pros and cons pan out in your own case.</p>
<p>Think long and hard about how much the extra hassle and administrative costs of being a limited company might be balanced out by the tax benefits. On top of that, some big companies only commission freelancers who are limited companies: but how important is that to you, really? Could that make a big difference to your bottom line, or are you happy with the commissions you’re getting as it is? Finally, consider whether protecting yourself against potential losses in future is important to you, as well as the privacy issues of having your accounts made public.</p>
</div>
<p>Creative Boom <a href="https://www.creativeboom.com/tips/should-i-register-as-a-sole-trader-or-limited-company/" target="_blank" target="_blank">Go to Source</a><br />
Author: </p>
<div>Tom May</div>
<p class="wpematico_credit"><small>Powered by <a href="http://www.wpematico.com" target="_blank">WPeMatico</a></small></p>
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												<div class="fusion-meta-info"><div class="fusion-meta-info-wrapper"><span class="vcard rich-snippet-hidden"><span class="fn"><a href="https://www.67nj.org/author/info/" title="Posts by 67nj" rel="author">67nj</a></span></span><span class="updated rich-snippet-hidden">2018-12-13T12:04:09+02:00</span><span>December 13th, 2018</span><span class="fusion-inline-sep">|</span>Categories: <a href="https://www.67nj.org/news/reading/" rel="category tag">Inspiration</a>, <a href="https://www.67nj.org/news/" rel="category tag">News</a><span class="fusion-inline-sep">|</span><span class="meta-tags">Tags: <a href="https://www.67nj.org/tag/creative-boom/" rel="tag">Creative Boom</a></span><span class="fusion-inline-sep">|</span></div></div>													<div class="fusion-sharing-box fusion-single-sharing-box share-box">
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