Deciding to start your own company is an exciting prospect, but it can be a daunting process, especially when you’re setting up as a contractor. However, working alone does not mean that you have to go through the registration process alone.
At CRO, we have over 30 years of experience helping business owners set up their limited companies in the best way for them. Whether this means starting a company with a team of people or as an individual, we are here to provide support through our range of company registration services.
Read on to explore our guide the differences between self-employment and forming a limited company and find out how our expert team can help your business thrive from the offset.
Self-Employment Vs Traditional Employment
It is important to first outline the differences between self-employment, operating through a limited company, and traditional employment; there are benefits and drawbacks, so you must weigh up both options before deciding on the best route for you.
As the name suggests, self-employment means that you work for yourself as a sole trader. Many people find this prospect enticing, especially after spending time working in traditional employment. However, while the benefits are desirable, there comes a lot of responsibility with running your own business as a sole trader, including tax and other legal considerations that an employer would otherwise organise. Sole traders are responsible for every aspect of running their business, from registering for Self Assessment to managing their finances.
Alternatively, some people choose to register their own limited company, which allows them to employ themselves through their business. This path offers additional legal protections and tax advantages but comes with a different set of legal and financial responsibilities. When beginning a new career, most people tend to choose the traditional employment route, which is essentially just working for an existing company. This path is a great way to build relationships in your chosen sector, gain experience, and learn about the industry. However, what you often get in guidance, you lack in flexibility and freedom. Typically, people would find their area of expertise and gather experience in traditional employment before branching out alone.
The Benefits of Being a Self-Employed Contractor
- As mentioned, starting a business as a sole trader or through a limited company is intimidating. However, if you have decided to take the leap, you must stick to the right processes for either path in order to reap the benefits that this route can offer. Here are some of the advantages of choosing self-employment as a sole trader or running a limited company:
- Independence. You will have the opportunity to create and manage your own schedule and make decisions about which projects you will and will not take on. This independence puts you in control over your work.
- Flexibility. Choosing when, where, and how you work is a fantastic benefit of being self-employed. Picking your own hours and having complete flexibility is incredibly desirable for many people.
- High-earning potential. As a self-employed contractor, you have the freedom to set your own rates. You will also have no fixed salary, allowing you to have a high-earning potential as you grow your business.
Of course, like with every business plan or company structure, there are drawbacks, too. For example, with traditional employment, you usually have access to automatic taxing, sick pay and maternity/paternity leave. People who choose to be employed by a company also tend to have a better work-life balance, so this is something to keep in mind when you choose to form a business as a self-employed contractor.
Legal Requirements and Complications
Sole Traders:
As a sole trader, you must register for Self Assessment with HMRC and are personally responsible for paying Income Tax and National Insurance contributions on your profits. You are also liable for any debts the business incurs. Sole traders must keep accurate financial records to ensure compliance with HMRC’s regulations but do not need to file annual accounts or pay Corporation Tax.
Additionally, both sole traders and limited company directors are often required to have public liability insurance and professional indemnity insurance depending on the nature of their work.
Limited Company Directors:
For those operating through a limited company, the legal requirements differ. One of the first things you must do is register your company with HMRC. CRO can assist with this as part of our company formation services. Once your company is registered, you will be required to file annual accounts and pay Corporation Tax.
You will also need to ensure that you take out public liability insurance, professional indemnity insurance, and any other relevant coverage based on your industry. As a company director, it is your responsibility to ensure compliance with any licensing requirements relevant to your sector.
Following on from the above, there are various legal and compliance requirements to abide by when you decide to become self-employed or set up a limited company. For example, one of the first things you must do as a self-employed contractor is register for Self Assessment with HMRC, rather than registering a company. Once you are registered, you can rest assured that you are not only compliant with UK law but have also made your business official and formalised in the eyes of the law.
Another legal requirement you must consider is your insurance. As a self-employed contractor, you must take out your own public liability insurance, professional indemnity, and any other relevant coverage related to your industry. Without this, you could be faced with financial and legal trouble should someone make a claim against you.
You must also consider the legal implications of your specific industry. Depending on your sector, you may need to obtain certain licences or certifications in order to comply with your industry’s regulations. For instance, if you intend to sell alcohol, you must obtain an alcohol license. While it would be your employer’s responsibility to ensure you are trained and have received the correct certifications before practising work, as a sole trader, this is your responsibility.
Understanding Taxation
Business owners are responsible for ensuring that taxes are handled correctly, which means that as a self-employed individual, or director of a limited company, this responsibility is yours. There are specific steps that you must follow to ensure that everything is dealt with properly, for example:
- Registering with HMRC for Self Assessment – typically, this must be done before 5th October in your second trading year and every following year in business.
- Paying income tax and both Class 2 and Class 4 National Insurance contributions.
- Sole traders are taxed on their business profits through Income Tax, paying both Class 2 and Class 4 National Insurance contributions.
- Limited companies, on the other hand, are subject to Corporation Tax on their profits. As a director, you may pay yourself a salary and receive dividends, which are taxed differently.
Staying informed about any changes to tax laws and deadlines is essential to avoid mistakes. For example, with the recent change in government comes some promises of change regarding taxation. Labour plans to stabilise tax, cap Corporation Tax at the current rate of 25% and not raise National Insurance, VAT, or Income Tax. This would provide self-employed people with much more predictability and peace of mind, allowing them to plan better and avoid risks and fines at the end of the tax year.
How Can CRO Help?
Starting a limited company is daunting, especially when you are alone, but with CRO, you will always have support, guidance, and trusted services to rely on. Our expert team helps business owners by handling the entire company formation process, from name registration to providing the necessary legal documentation. Ensuring absolute compliance is essential, which is why we offer ongoing support with statutory requirements, such as annual returns, alongside filing reminders to prevent penalties.
Please note that CRO’s services are tailored for those forming limited companies, not sole traders. We specialise in guiding business owners through the complexities of company formation and ongoing statutory compliance, such as annual returns and filing reminders.
So, whether you are starting your limited company or have been running a business for a while and need support, get in touch with CRO today, and we will be more than happy to assist.