2 – Defining types of business
Last Updated on 18 May 2023
NB: ‘Freelance’ means someone whose income is ad hoc or regularly comes from a variety of clients or employers. It can refer to both employment (e.g. fixed-term contracts) and self-employment. See help sheet 2f for more about defining freelance status and tax for freelancers working in film and TV production.
Are you SELF-EMPLOYED?
You are likely to be self-employed if you:
- are risking your own money in some way
- are providing your own equipment and training
- have a lot of control over your hours
- are free to hire others (and pay them yourself)
- take on work at an agreed rate – no matter how long it takes to complete
- work regularly for lots of different people
- have to correct your own mistakes in your own time
- are not supervised, directed or controlled by someone else when working for them
If you are newly self-employed you should register as a sole trader with HMRC as soon as you start up, and at the latest by the 5th October in your 2nd tax year.
You may fall foul of IR35 legislation if you do work which is effectively employment, even if you are contracted as self-employed, through an agent, or via your own company. (See more via my blog >)
Some types of business:
Sole Trader – one-person business (incl. some freelancers), often referred to as ‘self-employed’, particularly by HMRC
- relatively quick and easy (not many forms)
- personally responsible for any business losses – business debt is your personal debt
- have to keep a record of income and outgoings (see help sheet 4 on record keeping)
- usually taxed as self-employed (i.e. income tax paid on profits – see help sheet 3)
Partnership (See also Limited Liability Partnership (LLP))
- two or more people setting up the same business together
- everything business-related is shared – profits, problems…and losses
- if one person can’t pay their share of debts, the other partners are liable
- usually taxed as self-employed
- a “partnership agreement” is highly recommended – get yourself a solicitor
Limited company (See also Community Interest Company (CIC))
- the business is an entity in its own right, legally separate from you or anyone else working for it
- needs at least one director (company secretary no longer compulsory for small businesses)
- you are taxed as an employee of the company (so not as sole trader)
- salary payments must be reported to HMRC in ‘real time’ on or before pay day
- responsibility for business debts is reduced…though you may be liable for company debts
- you can raise money for the business by allowing others to subscribe for shares
- you can seek loans in the name of the company (though you may still be personally liable)
- company must submit annual accounts, director information, and tax returns
- you still have to submit your own personal annual tax return (as an employee)
- company accounts sent to Companies House, along with details of directors & shareholders
Reasons for setting up a limited company
There are four main reasons people set up a company as opposed to operating as a sole trader:
- Managing risk. The business is legally separate from you. For example if the business goes bankrupt you are not necessary personally bankrupt
- Sharing ownership. A company can be owned jointly by any number of people. A sole trader is a (sole) person.
- You might need to set up a company to get work or funding. Some organisations won’t give money to a sole trader business where they would if the business were a sole trader.
- The finances might be more favourable. Corporation tax for a small company is always 19% of profits. Salaries are amongst business costs offset against corporation tax.
On the other hand sole trader profits are taxed through income tax. If a sole trader profits are over £50K-£60K they may be paying 40% tax or higher (42% in Scotland).
If profits are high it may be better to run a company and pay corporation tax, PAYE taxes (income tax and NI) and dividend taxes instead. An accountant will need to advise on whether this is a good idea or not, and you’ll be paying them more for their advice!
Find out more:
www.gov.uk/working-for-yourself – Basic advice on how to start up www.gov.uk/government/publications/setting-up-in-business-se1 – Useful booklet (PDF)
Newly Self-employed Helpline – 0300 200 3504 (mornings are busy; try after lunch and midweek)
www.freelanceuk.com/ir35_ir591 – info on IR35 legislation for freelancers & contractors
www.companieshouse.gov.uk – essential for limited companies
www.youtube.com/user/HMRCgovuk – Yes, the tax office has a YouTube channel
www.gov.uk/cicregulator – more on Community Interest Companies
www.uk.coop – more on Co-operatives
www.simplybusiness.co.uk/knowledge – basically an insurance broker, but has a great blog
One person businesses:
Posted on 30 January 2020