Like many people throughout the UK web industry you might be thinking about becoming a Freelance Web Designer(especially with the last few years of recession). There are many different reasons for wanting to be your own boss, from not having anybody to report to, or being solely responsible for your successes (or failures). You may have a little bit entrepreneurial spirit within you, and love the idea of making huge wads of cash (who doesn’t).
These are all valid reasons for becoming a freelance web designer, however you have to make sure you explore each aspect of what will be involved in running your own business.
In the following blog posts I want to try to open your eyes to what is involved and hopefully give you a few little tips on how to set up and things to think about. From my own experiences…
Part 1 will be about the two main types of company you should choose.
Setting up a Freelance Web Design business can be quite straight forward, the first thing you will need to learn about is the different types of business you can set up in the UK, the most common are:
- Sole Trader
- Limited Company (Ltd)
This is the most common form of business within the UK (Note I didn’t say company, more n this later). What is a sole trader? “Sole Trader” is an individual who does business on their own behalf, a person who is solely responsible for the actions of the business and solely accountable. This is very important that you understand these two legal points, sole traders are personally liable for all of the debts of their business without limit, which means that their personal assets are at risk.
Sole traders have to register as self-employed with HM Revenue & Customs (Booooo! Hiss!) within the first 3 months of trading. Sole traders do not have to register with Companies House, but are responsible for filling out annual Tax Returns or Self Assessment Forms and returning them to HM Revenue & Customs in order to pay your share of Tax.
Learning some basic book keeping is essential. I use a website called FreeAgent to help produce my accounts and books… check it out!! (Ideal for the freelance web design set up.)
HM Revenue & Customs offer a huge amount of information to help people thinking about becoming a Sole Trader, this guide to registering as self employed is a good place to start looking.
There is one little downside I want to mention, If you are dealing with other companies the Sole Trader set up doesn’t appear to be as professional as the Limited Company. And may be a problem when dealing with businesses.
This is the most suitable type of business to form for the majority of people starting out in the freelance web design industry !!!
Private Limited Company (Ltd)
This is the path I chose (to begin with) and I regretted it shortly after, here is why. I didn’t fully understand what is involved with a Ltd company regards to the legal obligations and roles of the different aspects of a Ltd.
There are various Myths about Limited Companies which may lead to confusions, be very careful with Tax, Corporation Tax, VAT, Directors Dividends and Directors Loan Accounts. These are things you need to fully understand before going down the Ltd route. (very important advice).
Setting Up A Ltd.
You will need to register your company with Companies House, to do this you will require a Chartered Accountant to “Form The Company”. This can be done in two ways, form a brand new company, with no history of trading previously, or you canbuy a company which is up for sale. Either way you will have to pay £100′s to get set up. If you are buying a previously registered company you should research the company before hand, you don’t want to find out later that it has a bad name for one reason or another. (don’t worry you can rename your company).
Before your company is fully set up and incorporated into companies house you need to appoint a Director & Secretary, Ideally two different people, but it is allowed (not advisable) to be the same person. The Director & Secretary are the first two shareholders of the company. Private Limited Companies cannot issue shares to the Public, and are owned by the company members, ie shareholders.
Once the company is “incorporated” into companies house, you are ready to go, and have a pretty certificate to hang on your office wall which displays your Company Registration Number.
This is very important to get your head around, basically it is a concept set up to “protect” the shareholders of the business should anything go wrong. It states that the “company” is a different legal entity to the Shareholders & Directors. If the company owes money to people the Directors are not liable to pay its debts (in most cases).
Be very careful when dealing with Tax and limited companies, there is a myth surrounding Paying Less Tax by way of Director Dividends along side a minimum wage, however this is very risky and to my knowledge has been changed recently (hence the myth). If you are thinking about doing this I would strongly advise you talk to an accountant about the pro’s and con’s to this strategy.
There are two Tax’s you need to be aware of when you are running a Ltd. Personal Tax – Which is the tax you pay on your earnings similar to the Sole Trader. And Corporation Tax – Payable by the company, on the company profits. These are also at two different rates. When a company is trading it is liable to pay Corporation Tax (Dormant Companies don’t).
Not all Ltd companies are VAT Registered which basically means they cannot charge VAT on the sale of their services or products. If you want to charge VAT you have to register your company. There is a VAT threshold of £67,000, if your company earns more than this it must register for VAT or they run the risk of being fined.
Once registered a company can “claim back the VAT” where you will need an accountant to process a VAT return. An occupational hazard of being VAT registered is that the contractor’s limited company could be subject to a inspection. This can happen around once every six years, or more frequently if the VAT-man wishes it.
Ahhh… Tax Returns again…
A Company needs to submit its accounts each year to companies house, which will give information on Gross Profit, Net Profit, Turnover, Loss etc… In order to get this information compiled you have to use a Chartered Accountant, who will produce your End Of Year Tax and Annual Returns. These can be very expensive so I would advise choosing your accountant wisely. This is certainly a good question to ask them, “How much do you charge for producing annual returns?”.
This was the main reason I moved away from the Ltd company set up, I was paying huge amounts of accountancy fees.
- Easier to set up.
- Cheaper to set up.
- Sole Responsibility for the company actions.
- Lower accountancy fees (especially if you learn book keeping).
- May appear less professional set up than Ltd Company.
- Expensive to Form the company in the first place.
- Requires an accountant to set the company up.
- Limited Liability.
- Tax – Personal Tax & Corporation Tax.
- Director & Secretary set up.
- Benefits with VAT Registration.
- Expensive Annual Returns.
- May be seen as more professional then the Sole Trader.
Private Limited Company (Ltd)
Woooohaa, that was a long blog post, I hope it was of some use, for you guys thinking of becoming freelancers, or generally setting up in business. These are my views on the subject and hope I have provided a good level of information.
For further reading on this subject I would start by visiting the following sites:
Part 2 Is Here…. Have a read.