You’re ready to strike out on your own, but how will you best position your new self – sole trader or limited corporation? The choice you make will of course affect your tax status and other financial concerns, but you also need to consider your marketing and how you envision the future of your endeavor. Here are some considerations when looking for the “just right” framework.
All About Those Basics
Almost any independent setup will have a few universal needs: a reliable laptop, wifi, the software you’ll need, and good – even if basic – bookkeeping practices. Leave no stone unturned when it comes to counting expenses; many things are allowed that you might not expect, such as research and development you’ve done before setting up the business.
Is your work going to be straightforward? You want to be a writer and intend to market yourself as such to technology companies. Or is your path more curved? You’ve realised that you can make money on both your homemade beer and upcycled wooden lamps.
In the first instance, you could certainly choose the freelance path of sole trader. Your expenses will likely be minimal or at least uncomplicated, and you need only register with the HMRC for self-assessment. When filing time comes, the HMRC will calculate your tax for you. You also have more leeway in your accounting in this structure: your income can be reflected as personal. You actually can employ people as a sole trader, but you cannot operate under a separate business name.
When you begin using a limited corporation designation, you become responsible for new accounting procedures and for paying new taxes. Some aspects sound complicated, but they aren’t really: You need a director, which can be you; and you need at least one shareholder, which can also be you. As a limited corporation, you can choose a name for your business. SME accounting specialists caution that, with this status, you can end up paying more tax, so you need to weigh what your liability could be against your potential income.
Another consideration is that many businesses will contract only with limited corporations. Survey friends and former colleagues (or current ones, if it doesn’t jeopardise you) about whether their companies have requirements regarding contractor status.
For your initial research, the HMRC’s website provides clear information on the different designations and can even provide you with advice on setting up.
Nothing is set in stone, so you could change your status at any time, but which you choose could have bearing on, and should be influenced by, how you intend to build your brand.
Now it’s time to get out your crystal ball and see if you can get a glimpse of you in three years’ time. Are you writing away in your home office with the occasional foray to a city centre café for a steady stream of interesting clients? Maybe you find yourself unable to meet orders on those cool lamps and need to bring in some help.
Do some exercises, even if they’re just on notebook paper, of creating materials and a website that markets you. Try on different personalities and voices. Maybe your product or service would benefit from having a name other than your own, or you want the work to be associated with you personally. Get outside opinions on how your pitch comes over.
How would choosing limited corporation or sole trader affect your graphic design scheme or website? Consider the potential “hidden” costs of a change in your status: a redesign, rebranding, reordering of finances.
When setting up, it’s worth a bit of your energy to look at every angle, using both numbers and your imagination to lay the stones for your path.