Self-Employed vs Limited Company Status – What you need to know?
The Prestige Business Management Comparison Guide – Self-Employed vs Limited Company Status – What you need to know?
This guide will introduce and compare how self-employment vs Limited Company status will affect your business. We will outline how to register, what the ‘Tax Year’ is and the big difference between the two different ‘types’ of business structure.
There are advantages and disadvantages to both business structures. However, the underlying purpose of this guide, other than helping to educate you about the right business structure for your start-up idea, is to also highlight the importance of sound financial advice – Prestige Business Management can provide bespoke start-up advice helping you to navigate the pitfalls of business with the full assistance of our trained business finance specialists.
Baby Steps – Those Tentative First Steps in Business
The adage, always learn to walk before you can run, really highlights the importance of using the simplest means to help you start on your business voyage. The Ltd vs Self Employed (SE) argument, when your business is starting-up, is really a false equivalence.
Start as simply as possible and opt for self-employment. When your business has won its first client or sold a product to its first customer, having to understand the complexities of business law, business finance and articles of association can be daunting. Therefore, start as simple as possible. Go self-employed.
You have three months to register for self-employment self-assessment. That gives you the freedom to test the ground in real-time. This means you have the ability to scale and the agility to bootstrap your growth based on your own hard work. It is the purest form of business structure and the simplest organisational form.
At Prestige Business Management we can help advise you about self-assessment process, provide fully automated accounts support – either in Excel or through QuickBooks, and a really cool free receipt scanning app to help you keep on-top of your invoices, bills and receipts.
How To Register as Self-Employed
Self-employment means you’re ‘working for yourself’. You are a business in all intents and purposes. It may not feel like it but once you grow and lease premises, employ staff and make sure you have the right insurance protection for your trade, you’re operating just like any other business. This is why you need to make sure you register as accurately as possible. You also need to understand the ‘dos and donts’ involved in trading under a business name.
Once your business has started to grow and has become a real ‘going concern’, you need to sit down and think seriously about the next steps in your business’s evolution. However, there are benchmarks that mean you have to register. For example, if you earn more than £1,000 from self-employment work between April 6th 2018 and April 5th 2019 or you wish to claim state benefits or qualify for state benefits by paying the right Class 2 National Insurance contributions. Once, this ‘benchmark’ has been met, you need to register with haste.
Register online with HM Revenue & Customs. It is quick and easy. Once you’ve got an account with HMRC, you will receive your Unique Taxpayer Reference (UTR). Then you can access your account once you receive your activation post – which is unfortunately sent through Snail Mail which means it can take 10 working days to get to you. Once you’re logged in, you are fully registered with HMRC and you can submit your tax returns – Whoopee! However, Prestige Business Management can help you setup and register with HRMC – freeing you up to do what you do best; run your business.
On a personal note, you will need to set-up a separate bank account to help divide your own personal money from your day-to-day business account needs. Furthermore, you will need to think about how you intend to pay into a pension scheme and you might need to talk to your mortgage provider or landlord to ensure that you are allowed to a run a business from your own home.
Self-Employment versus Ltd Company Status – A Comparison
You need to make sure you do this right because if you choose the wrong business model you could end up paying more tax than is necessary. The most appropriate business structure will predominantly depend on a multitude of factors – from tax implications, ownership rights, liability needs and the purpose of the entity. You need to plan your progression, therefore if the chosen structure isn’t satisfying your needs, you can swiftly change. Prestige Business Management can help you navigate this process with ease – helping you to better understand your business and growth demands. However, let us take a moment to evaluate and compare both business structures.
To understand which structure will suit your needs you need to understand the type of client/customer you will be targeting. Liability is the first link in deciding the right pathway. There are some who argue that Ltd Company status affords small businesses with prestige – and while some big clients won’t work with self-employed traders and freelancers, there are some who will. Therefore, you need to focus on liability first and foremost. Business is all about risk. You need to understand that if a client/customer passes on risk by failing to pay an invoice on time or failing to deliver a milestone, this could impact you financially which could result in personal loss.
A self-employed person’s own financial affairs aren’t separate from their business activities. HMRC and the wider financial world will see the individual’s finances as a whole. This means your assets – like home or car – could be at risk if you fail to repay a debt for your business. However, a Limited Company comes with Limited Liability. This means your own finances and the company’s finances are separate. So, evaluate your business, your client type and then you’ll understand the right pathway towards business structure success.
Let’s Compare – The Details Explained
A lot of entrepreneurs choose self-employment to begin with, but if you’re still on the fence then you need a break down of what it means to be self-employed, how you register and the advantages and disadvantages therein in relation to tax and the benefits attached to each ‘type’ of business structure.
Limited Company – A Comparison Breakdown
What is a “LTD Company”?
As stated above, a Limited Liability Company has its own legal identity which is separate from its directors and shareholders – unless we are talking corporate manslaughter or serious criminality then a company director cannot be held personally responsible and therein accountable for the company’s decision-based outcomes.
Who ‘Owns’ What? Are You The Proprietor?
The company isn’t owned by “you”. Even if you founded the company, ownership is based on share ownership. Therefore, if you sell off 10% or 49%, whatever remains is your stake in the company. You will own the proportion of the company that is connected to your share ownership capital rights.
You are not “your own boss” in a limited company. You are a company officer, i.e. a director, within the company and you report to the shareholders of the company whose interests you primarily manage and protect. Furthermore, an officer of the company, as in a Managing Director, isn’t necessarily linked to employment law norms. You are not automatically entitled to employee status and as such benefits like the National Minimum Wage or government benefits like Tax Credits are not automatic ‘rights’.
Legal Protections & Disputes
Legal disputes, in the context of a limited liability company, means the company as an entity will be legal party in any legal proceedings under English and Welsh business law. There are limitations to the ‘liability’, for example if the directors perpetrate a fraud or breach health and safety law leading to manslaughter, the individual directors are then personally liable.
Tax – Who Pays What?
In a Limited Company, the company is liable to pay tax on any and all taxable profits. This is ‘unique selling point’ for Ltd company status. The corporation tax rates are a lot lower than individual personal tax rates. However, officers and employees of the company are subject to PAYE and NICs on all income. Furthermore, shareholders are also liable for dividend tax on any and all income derived from the shareholding.
When You Make a Loss
When a company makes an annual loss, the company can “offset” the loss against other incomes generated by the business. The loss is a ‘company’ loss and does not equate to a ‘personal’ loss in terms of your own personal finances.
Taking Money Out of Your Business
As a company director and a shareholder, you will be paid a salary in order to avoid PAYE and NIC tax on payroll and the dividend would be paid on-top of your salary. The dividend, for it to be classified as a dividend and not a loan (for example) the sum would need to be agreed by an official board meeting with minutes taken and thereafter the sums would be allocated based on the share ownership structure.
Self-Employment – A Comparison Breakdown
What is a “Self-Employed” Business?
In plain English, you are literally your business. What you do equates directly to your business. You are self-employed.
Who ‘Owns’ What? Are You The Manager?
You ‘own’ the self-employed business because you are the business. There are no ‘officers’ or ‘shareholders’. You have total control over the ownership dynamics of the trading entity as an individually self-employed contractor or freelancer.
Legal Protections & Disputes
If you are legally challenging or being challenged legally, you are personally liable in any legal proceedings and disputes therein. Unlike a Limited Company, which affords its directors with the limited liability protection measures, a self-employed business owner does not have those same levels of legal protection. You can take out specialist liability or indemnity assurance schemes, but you are still individually liable.
Tax – Who Pays What?
When you make a profit you have to pay tax, like a Limited Company. However, the big difference surrounds the scale of the tax and how it is assigned. You will pay tax at a higher rate than a Ltd company because you will in fact be paying Income Tax and not Corporation Tax. This means you will have to pay tax along with National Insurance contributions (both class 2 and class 4). This means you could be paying more than a Limited Company with the same revenue stream as yourself. This is the tax-based drawback of self-employment.
When You Make a Loss
You are liable for your losses and that there are caps on any relief you may claim on losses. Furthermore, your scope for offsetting your trading losses from self-employment isn’t as diverse as a limited liability company’s ability to offset losses.
Taking Money Out of Your Business
You have a lot more freedom as a self-employed business owner in regards to extracting profits from your business without immediate taxable impact. The Limited Company structure means any withdrawals from the company must be distributed within strict frameworks – like dividends or benefits etc. – but the self-employed business owner has more freedom. They can withdraw money with greater freedom as and when required without organisational hindrance.
Which is Better Self-Employed vs Limited Company – A Conclusion?
The biggest difference between self-employment and Limited Company status surrounds the savings efficiencies that result in terms of tax and national insurance payments once your business profits at the £40,000 mark. If your business profits are under £40,000, then limited company status would in fact hinder your ability to legally reduce your tax footprint.
However, the financial strictures of a limited company can hinder growth. Hence, why many start-ups eschew the limited company structure in favour of self-employed freedom. That being the case, in a technical sense, the benefits of Limited Company status outweigh the negatives. The limited liability protection, the lower tax benefits along with the credibility dynamic that finds some self-employed businesses excluded by an invisible firewall – one that sees big companies trust Limited companies due to their ‘professionalism’ as oppose to self-employment.
As will all business decisions, you need to make sure you engage the services of a good accountancy partner. This will be a uniquely rewarding partnership in terms of how your business with grow and become more profitable in the future. Prestige Business Management understands how businesses are unique and how self-employment and limited company status can benefit or disadvantage business growth. Why not call our team today on 0203 773 2927 to find out which business structure would suit your business start-up endeavours?