There are many reasons why you may want to become a freelance designer. It might be that you are fed up of working for someone else, you would love to be your own boss, to shake up your career, you want to choose your own hours, or you want to work from home. Whatever the reason, it can be an exciting but scary process, particularly as you have to decide what company structure you are going for; the most common being either Self-employed or Limited Company. Our guide will help put your mind at ease when making this decision by explaining the high-level advantages and disadvantages of each structure so that you can make an educated decision as to which structure suits you best.
Key points to consider when determining whether to register as Self-Employed or a Limited Company?
- Expected income and profits of the business
- Your other earnings and personal tax position
- The level of personal risk or financial liability you are comfortable taking
- Brand perception and customer preferences
- Future plans and flexibility required for the business
Deciding on the best legal structure for your business is an important decision and one we recommend you consider carefully; speaking with an accountant is always a great idea too.
There are a number of advantages and disadvantages for these two structures that you will need to weigh up in order to determine which business structure is best for you. We have summarised these for you.
What does being self-employed mean?
Self-employed designers do not work for a specific employer who pays them a consistent salary or wage. As a self-employed designer income is earned by offering design services or selling products, such as prints or courses, directly to customers or businesses. As a freelance designer you are required to win work or customers and take responsibility for the success or failure of the business.
Self-employed designers tend to have multiple customers at one time and are responsible for determining their own working pattern and place of work. Additionally, they usually provide any tools or equipment required to complete their design service or product offering.
What does operating as a limited company mean?
Many of the indicators of being self-employed apply to owners of a company as well, however, instead of being self-employed you are considered both an owner (shareholder) and employee (director) of a limited company.
A Limited Company is a general form of incorporation that limits the amount of personal liability undertaken by the company’s shareholders and directors. This means that as a director and shareholder of a Limited Company, the business and you are seen as separate legal entities, which provides a layer of protection to your personal assets.
This means that should you set up you own design business as a Limited company and you fall on hard times, becoming unable to pay suppliers you as the business owner would not be responsible for settling the company’s debts with your personal funds.
Self-employed vs limited company
Setting up as either structure will bring its own advantages and disadvantages, so starting with the self-employed option let’s delve into the detail.
Benefits of being a Self-Employed Freelance Designer
- It is straightforward and free to set up and register with HMRC
- Self-employed businesses are a simple way to operate as a freelance designer without the administrative burden that comes with running a limited company. For example, only required to file a self-assessment tax return for HMRC annually
- As a self-employed freelance designer, you have greater privacy than that of a limited company whose details are published at Companies House
- Broadly speaking self-employed businesses are easy to close and also simple to transition to a limited company in the future
Considerations of being Self-Employed
- Self-employed designers have unlimited liability, as they’re not viewed as a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable. As a result, self-employed individuals could lose personal assets if things go wrong
- Raising finance can be more difficult, as banks and other investors tend to prefer a limited business. This can limit expansion opportunities for self-employed design businesses
- Tax rates on self-employed individuals aren’t always as favourable as they are on limited companies. When you reach a certain level of earnings, it might not be as lucrative to stay self-employed as the tax rates are higher
- Clients or customers sometimes see self-employed businesses as less attractive than a limited company, this is because there is a certain prestige that comes with being limited
Benefits of being a Limited Company
- Unlike a self-employed business setting up your design business as a limited company has the benefit of limited liability. This is because incorporation forms a legal distinction between the business owner (you) and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company
- Once you’ve registered a company name nobody else can use it, in contrast to running a self-employed business. It is worth noting here that it does not give you the same protection as a trademark.
- Generally speaking, limited companies stand to be more tax efficient than self-employed businesses, as instead of paying income tax companies pay corporation tax on their profits. Directors then extract personal income from the company through a combination of relatively low salary and dividends. You could for example take a salary below the tax-free allowance, and assuming you have no other income (e.g. from another job or a rental property) it would not be subject to tax and only attract minimal national insurance contributions if any. Then you could take the remainder of your required income as dividends assuming there is adequate profit generated, which are subject to lower tax rates than income tax. Additionally, there is a wider range of allowances and tax-deductible costs that a limited company can claim against its profits compared with a self-employed business
- Running your design business as a Limited Company provides you will a certain level of prestige in terms of brand image that self-employed businesses do not. Generally, companies working with designers prefer to work with limited companies as they are seen as a more established business, often making them appear more professional than sole-trader businesses.
- Operating as a limited company can make it easier to attract clients, investors and obtain debt compared with other business structures
- As a director of a limited company, you can make company contributions to a personal pension scheme. This means the company gets the tax deductibility of the pension cost and the director doesn’t have to pay to take the money out of the company and then invest it into a pension, resulting in tax savings
Considerations of operating as a Limited Company
- If you operate as a limited company, there are additional responsibilities. These are called Director’s Fiduciary Responsibilities, which basically outline what a limited company director must do legally. This includes, filing a yearly annual return and a set of annual accounts
- These added responsibilities of being a limited create an additional layer of cost as you will have to hire an accountant, compared with being self-employed where it is possible to do your tax return yourself (though many self-employed people opt to use an accountant due to the tax advisory element)
- It can be more time-consuming to operate your business as a limited company, as you’ll need to deal with extra responsibilities and paperwork, you will also need to pay a fee to register the company
- As a limited company your information can be found via the company register, including details on directors and your company’s earnings required to be shown publicly (though do bear in mind ‘small companies’ as defined by the Companies Act 2006 have less disclosure requirements). This sort of transparency may not appeal to all
So, what should you decide?
Ultimately the choice as to whether you chose to be a sole trader, or a limited company is completely up to you. If you are looking for a simple way to set up as a freelance graphic designer, then a sole trader is probably the best place to start. As a freelance designer there may be some clients that do not take on freelancers unless they operate as a limited company, this could sway your decision to start up as a limited company.
Whatever you decide, the best thing to do before you register is to sit down with an accountant to get their professional opinion. All accountants offer a free consultation call, so you would be silly not to use this.
Where you can find me
About your author
“The Orenda Collective provides a holistic approach to the financial aspects of your business. We work with current or aspiring business owners in the creative industry to strategise for growth, achieve financial goals and form valuable business connections. Our mission is to play a part in closing the gap, by championing female owned businesses and encouraging a collaborative network of all genders to learn and grow together.”
You can find out more about Emily and her business here.
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