Since the recession, an increasing number of people have chosen to go self-employed.
Jobs for life tend to be a rarity in this day and age and this uncertainty has led to many people moving towards having more control of their own lives and finances.
Employers are more likely to look for people with a broad spectrum of work experience than they would have previously.
I remember first taking the dive into self-employment and I also remember setting up my first limited company.
It was a scary time for me but, at the same time, the fear was mixed with excitement and I realised that I was making a decision that was right for me.
The different types of self-employment
It’s important to define which is best for you before you start a business. It can affect thing like the tax rates that you need to pay, how you are able to take money from the company, your responsibilities and liabilities in the event of a loss as well as the paperwork that needs to be completed.
A sole trader is more straightforward self-employment. It can mean some extra risk to the business due to the fact that all business debts must be paid if it fails.
“A sole trader is more straightforward self-employment”
It can also make you more personally accountable in the event of a lawsuit. As a limited company it is the company that is being sued but, as a sole trader, you yourself are being sued.
If it’s a low-cost business that is unlikely to incur any debts or cause any personal or financial damage to another party then a sole trader might be the right choice for you.
However, if you’re likely to incur any significant debts or legal risks, the financial protection offered by becoming incorporated and forming a limited company might be more advisable.
Sole traders keep all of their business profits after tax has been paid on them.
Setting up as a sole trader
Setting up as a sole trader is relatively straightforward. Go ahead and register for self-assessment with HMRC. It’s a good idea to do this as soon as you can once the business starts trading.
As things currently stand you will need to register as a sole trader by October 5th of the business’ second tax year. So if you started your business in the 2018-2019 tax year you will need to have registered by October 5th 2019.
A partnership is when a business is owned by more than one person, where they are all responsible for the growth of the company.
These partners are also liable for any losses made by the company as well as bills for anything the company owes money on.
Profits are shared out between all partners and individual tax and NI is paid by each partner. Partners can be people or companies.
One person is nominated for the responsibility of accountancy for the partnership.
Setting up as a partnership
The person who was nominated for the responsibility of accountancy will have to register the partnership with the HMRC.
This automatically put them up for self-assessment themselves as well.
The other partners in the business then need to register for self-assessment themselves so that they can pay NI and tax on their shares of the profits.
You will need to register your partnership within the same time frame as a sole trader.
A limited company is a form of business that separates the people that own and run a business from the business itself, making it its own entity.
With a limited company, shares are held by the individuals and profits are owned by the company itself after the company pays corporation tax.
These profits are then shared out with the shareholders. Shares in the company can be bought and sold.
The term limited comes from the idea that the company is ‘limited’ by its shares. At formation, a company might issue 100 shares at £1 each and these shares are paid for in full by four shareholders at 25 shares each.
However, if these 25 shares each aren’t paid for in full and the company goes bust, the company directors are only responsible for paying the value of its remaining unpaid shares.
Usually directors own shares in a limited company but this isn’t necessary. Directors are responsible for running a limited company and this can be anyone.
As long as the law hasn’t been broken, company directors aren’t made responsible for the business debts if the company makes a loss.
Setting up a limited company
The limited company must register itself at Companies House and give HMRC a date for when the business officially starts running. If the company expects to take more than £81,000 per year it must also register for VAT.
Every year the company must also provide statutory accounts to HMRC that comply with either UK Generally Accepted Accounting Practice or International Financial Reporting Standards.
An annual return must be sent to Companies House and HMRC must receive a Company Tax Return.
Directors must fill in a self-assessment tax return and, if a salary is paid, pay NI and tax through PAYE.
Limited liability partnerships
Partners in limited liability partnerships aren’t personally liable for debts incurred. As with limited companies, their liability is limited to the money invested into the business at the business in the beginning.
Liability for debts is split into two categories. The debts of ‘general’ partners and the debts of ‘limited’ partners.
General partners are liable for all debts incurred whereas limited partners only need to pay the amount initially invested in the business, just like with limited companies.
Setting it up
Visit this Companies House link to find out more about setting up this kind of partnership company.
Other types of legal structures
The below three legal structures are unlikely to be relevant to the reader who wants to know how to become self-employed. However, I have added a brief description of them for the sake of clarity.
- Public Limited Companies are companies where shares in the company are publicly traded on markets like with stocks and shares.
- Private Unlimited Company is where liability is with the shareholders and/or directors for any unpaid debts owed by the company.
- Private Company Limited by Guarantee is where the organisation is backed by those who have a stake in it for a specific amount in case things go badly.
Choosing the right legal status for your company is important to get right. There are pros and cons to all of them.
Some structures may seem more dynamic and flexible than others. Some will offer more protection than others. Some will come with more bureaucracy and other headaches.
If you’re unsure, in some cases it may be best to start off as a sole trader and, when things start getting serious, you can incorporate your business.
Legally, this isn’t always the best option for certain types of business though.
The most important factor for most people is taxation. Often people will choose the structure that will save them the most money.
If you’re really unsure, speak to a qualified professional accountant (ideally chartered) who should be able to point you in the right direction.
Should I take the jump into self-employment?
I have never looked back from going self-employed. In my experience, life as a whole is far more enjoyable when self-employed, although the evenings and weekends can take a bit of a hit from time to time.
Sticking to set hours is almost impossible to uphold all of the time and, in my experience, learning how not to bring the anxieties to bed with you at night is an important skill to learn in the beginning.
Having said this, I never got into self-employment because I wanted to work fixed hours. I hated having my life work around being in a fixed place at fixed times every day of every week. I love the flexibility that it allows.
I love being the master of my own destiny, whether things turn out good or bad. However challenging it can be, at least I know that what happens is as a direct result of my actions.
I like to grow as a person and, with the right kind of growth mindset, learning to be successful in business will help you to grow as a person.
I heard it said one and it’s very true to me, ‘I’d sooner give up all my businesses than the lessons I learned from building them’.
It brings me a great deal of self-confidence knowing that, if forced to, I could start a business all over again and have a really good chance of making it a success.