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Types of self-employment – which is best for you

You’re all set to take the plunge to self-employment. Before you can start though you’ll need to make one very important decision and it’s not your company name! You’ll need to decide from a choice of business structures. Each one has its pros and cons.

You’ll need to know a bit about all of them to help you decide which is the one for you. Understanding the difference might even sway you from one you’re thinking of now to another which might be more profitable or safeguard your personal life if your business was to face financial problems!

Below is a summary of the different ways you can work for yourself.

Be a sole trader

This is a popular choice if you’re a one-man-band. It’s easy to set up as a sole trader and if you need to, easy to stop being one as well. There are also not as many regulations to follow and low running costs.

As a sole trader you’ll be responsible for keeping all your financial records up-to-date and you might decide to hand everything over to an accountant to do your end of year books. As there is less work for them to do than a limited company, it’ll cost you less.

The downside to being a sole trader is that you are liable for all debts (called unlimited liability). This means that if your business gets into debt, you personally owe the money. In the worst case scenarios – depending on how much you owe – this could see you losing your home and personal savings.

Another problem is that sole traders can find it harder to raise finances to fund their business.

Become a partnership

In a lot of ways, this is like being a sole trader only you’re not alone! You’ll still be subject to unlimited liability as before.

The main difference is that you can pool your experience to manage your business. This kind of working relationship is popular with dentists, doctors and accountants.

Go Limited Company

As a Limited Company you have different legal rights as well as different obligations compared to being a sole trader or partnership.

As a business you’ll need to be registered at Companies House. There is also a choice of private limited company or public limited company. As the second one is for larger companies which trade on the stock exchange, you’ll probably be a private limited company. You can become public limited once you’ve made your first million!

As a limited company, ownership of the company is divided into shares. These can be divided between shareholders who then own the company. If you’re setting up by yourself you can own all 100% of the shares.

Main Benefits of Going Limited

One of the main benefits of going limited is that you can pay less tax than a sole trader. This is because the company is subject to Corporation Tax, which is currently 20%. What a lot of people do is then pay themselves a minimal salary and then take what are called dividends out of the business. This reduces how much National Insurance Contributions (NICs) you pay as dividends are not subject to NICs as they are taxed separately.

Also, if you set up a pension through your company, you could also be better off tax-wise

Another benefit of having a limited company is that unlike being a sole trader, you have limited liability. This means that unless fraud has been committed, you are not personally liable, the business is. This means you have added protection if anything was to go wrong.

Being a Limited Company does make your book keeping more difficult, so your accountant bill will be higher. Though this shouldn’t be by a great deal and if you’re good with your accounts there is nothing stopping you doing it yourself, especially thanks to a lot of tools you need being online these days.

Another plus, is that it gives a more professional image to be a limited company than a sole trader. You also get to register your company’s name at Companies House and once you’ve done that it’s protected by law.

One thing that you’ll need to get used to when you set up a limited company is that the company is separate from you! The money it makes is the company’s not yours. Though you obviously run the company, so you are in charge.

Other options

As well as the three options above, there are other ways of working for yourself which fall into them.

Join a franchise

This sees you starting a business that is owned by someone else. Examples of famous franchises are big names such as McDonalds and Hertz, but there are lots and lots of others out there of all shapes and sizes.

With a franchise, you pay to use a business model as well as an ongoing fee. The advantage of this option is that the workload and start-up costs are lower, it’s also normally easier to get finance and you’re setting up a business which already works with suppliers, distributors and marketing behind you. On the downside, you could face constant large fees which can hold back your long-term profits and you can be restricted from trying cheaper ways of working. Finally, if another franchisee harms the franchise in some way, it can damage your business as well.

Be a freelancer or consultant

As a freelancer or consultant you charge others for your specialised skills, knowledge or experience working for businesses on a project by project basis. You also have the luxury of charging whatever you think you are worth. Though there will, of course, be industry standards in the way of fees, so you can’t just pick a number out of thin air! You can also be hired out to clients through a company who decides how much to charge and then takes their cut. This saves you having to go out and look for work but means you’ll probably earn less per job.

Start a social enterprise

These are companies created to either benefit society or the environment. You’ve probably heard of some of the bigger ones like The Big Issue and Cafédirect.

There are a few different types of social enterprises you can start. These include a cooperative, credit union, development trust, employee-owned business or housing associations. As a social enterprise you must openly reinvest profits to achieve its objectives.

Become a charity

As a charity, you get your income from donations and grants. You also pay reduced business rates and get tax breaks. Charities are usually run by trustees, who don’t benefit from it. The trading part of a charity means that it can be classed as a social enterprise but what makes them different is the way they get their income through the grants and donations.

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