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Set up as a sole trader or as a company in the UK?
Thread poster: John Simpson
John Simpson  Identity Verified
United Kingdom
Local time: 05:21
Member (2004)
French to English
+ ...
Aug 29, 2006

I have recently returned to the UK after working in Spain since 2000. I was working as a freelance translator and wish to carry on doing the same here in the UK. For financial reasons I would like to know whether it is worth my while to create a company (llc, psc...?) or to work as a sole trader. I would be very interested in hearing from people who have worked as both.

Thank you in advance,

John


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Sophia Hundt  Identity Verified
Local time: 23:21
Russian to English
+ ...
I would like to join with a simlar question for US Aug 29, 2006

This is an excellent topic and while I can offer no feedback, I would love to hear from those who do similar things in US, where I live.

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Eva Middleton  Identity Verified
Local time: 05:21
German to English
Ltd if the volume is high enough Aug 29, 2006

Hi John,

Personally, I would go for a limited company, mainly because you can distribute your income between yourself and another party and pay yourself with a mixture of dividends, PAYE etc, which really keeps your tax right down.

I don't really have any experience of working as a sole trader. Looking at the information though, it seems like you get none of the protection & benefits a Ltd company gives, but still have all the hassle of submitting accounts etc.

We (my husband and I) have a super accountant and pay him £55 per month to do all the accounts stuff for us.

Here are a few links you might find useful:
http://www.startinbusiness.co.uk/flowchart/4flowchart_legalformat.htm
http://www.bytestart.co.uk/content/19/19_1/what-is-a-sole-trader.shtml

Hope this helps.


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Gillian Searl  Identity Verified
United Kingdom
Local time: 05:21
Member (2004)
German to English
I recently asked an accountant Aug 29, 2006

and he asked me loads of questions. But for me it came down to:
Do you want to do loads of admin work and form filling or pay someone to do it for you? If not stick with being a sole trader. Why not sit down with an accountant and let them ask you the same questions - maybe you will come up a different answer.

Gillian


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Charlie Bavington  Identity Verified
Local time: 05:21
French to English
Self-employed for the "simple life" :-) Aug 29, 2006

I'm self employed now, and was once involved in starting up a company (which went nowhere and was nothing to do with translation) and worked with lots of IT contractors who were limited companies.

Eve makes some good points although:

a) translation is relatively risk free, you are unlikely to have to borrow money or become embroiled in anything likely to put your personal assets (e.g. your home) at risk (esp. if you take out insurance), so I'm not sure the limited liability aspect is THAT important in our profession (ditto IT, come to that)

b) re: accounts - you do not HAVE to have accounts in any formal sense, just enough to fill out the self-employment section of the self-assessment form (altho' keeping some kind of accounts is, of course, a good, even essential, idea!). My accounts are certainly not involved enough to warrant 55 quid a month (= 2 hours of my time?). However, I accept that I tend to the "keep it simple" approach, and it's possible there are allowances etc. I'm not claiming for.

c) re: PAYE - if you set up a company and employ yourself, don't forget you have to pay both EEs (from the LEL to UEL) and ERs NI contribs, the latter being effectively another tax of 10-11% (go to IR website for actual rates) on your salary(ies). However, as Eve points out, if your cash flow allows it, you could pay yourself quite a low salary and then compensate for that with dividends (taxed at 10%, I think?).

d) you do need 2 individuals to set up a company, altho' one can effectively do nothing concrete. So you do need a trusted individual to set up with. This can be good, as Eve says - you don't HAVE to employ this person, just give them a divi - can help make one person's earnings more tax-efficent if spread between 2 people.

In summary, I would say:
a) if you like to keep things simple and/or you're by yourself and/or your income is nothing spectacular (say up to 30k GBP?), self employment is probably sufficient
b) if you don't mind administrative overheads (both in time and money) and/or you have a partner (in life, not just business!!) & would like a tax efficient way to spread your income between you and/or your earnings are significant (certainly over say 50k GBP) and your cash-flow situation allows you to go down the low-salary-plus-dividends route, then a company may be best.

My guess is that there must be a level of income at which a company makes more sense than self-employment, and my gut feeling is this is probably around the 40k level (from my experience with IT contract staff), but in any event this depends on your personal circs.

[Edited at 2006-08-29 22:12]


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Olav Rixen
Canada
Local time: 21:21
English to German
+ ...
Ltd. vs sole trader Aug 30, 2006

I've been wondering myself whether to start a company or not. My question is, aren't you likely to be taken more seriously by potential clients if you are a company? What impact does the 'Ltd.' behind your outfit's name have on potential clients, when they are looking for translation services in the yellow pages, for example?

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Daniel Bird  Identity Verified
United Kingdom
Local time: 05:21
German to English
Something to look out for Aug 30, 2006

In my time I have come across outsourcers who will not write a PO for a Ltd Co, insisting that they will only outsource to individuals. If you've never come across that one before you can imagine what went through my mind when I heard it for the first time. I can only imagine what the objections might be - e.g. are these geniuses concerned that my Ltd Co in the person of yours truly will sub out the work further? (I could do that as a freelancer in any case).
My point is, it will pay to know your clients' policies before diving in to company formation etc.
As for the financial benefits/disadvantages, my experience is that a UK Ltd Co is useful for redistributing income at a reduced rate of tax, even accounting for employer's NI contributions, provided you live and work in the UK. It might not be so advantageous if you live abroad.
Also don't forget it's possible to work freelance and be paid PAYE by a Ltd Co, so e.g. you or some other person in your family could be self-employed but still receive a PAYE cheque, dividends etc. from the company. The one does not exclude the other in these days of portfolio careers.
The flip side of all this "liberalisation" in UK company law is that being incorporated as a Ltd Co and appointed a director is not regarded as a sign that your outfit is necessarily any more reliable than Joe Freelance's.
Cheers and good luck
DB


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Charlie Bavington  Identity Verified
Local time: 05:21
French to English
Look out for IR35 Aug 30, 2006

Daniel Bird wrote:

Also don't forget it's possible to work freelance and be paid PAYE by a Ltd Co, so e.g. you or some other person in your family could be self-employed but still receive a PAYE cheque, dividends etc. from the company. The one does not exclude the other in these days of portfolio careers.


Make sure it IS a portfolio career though - if you claim freelance status but all your income is derived from one source, the Revenue will (assuming they bother to look!) deem you an employee of that company. They tout this as protection for the individual, to prevent companies making people work for them without having to pay loads of NI and paying for sickness, holidays, maternity etc.

Try not to fall foul of IR35 too (it's all related):

"The IR35 rules were invented primarily to stop freelancers (particularly IT contractors) from drawing income in the form of a small salary and large dividends from their limited companies, where ordinarily they would be paid a standard salary for performing the same role if they were not working via their own limited company".


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John Simpson  Identity Verified
United Kingdom
Local time: 05:21
Member (2004)
French to English
+ ...
TOPIC STARTER
Thanks to everyone Sep 5, 2006

Thank you for getting back to me on this. Sorry for the delay. On the same day I posted this question I also sent an e-mail to four chartered accountants explaining my situation and stating that I would be interested in hiring their services if I went ahead with setting up a company. Well, all I can say is that their absolute silence tells me a great deal!

I think, Charlie, that you are right about there being a threshold beyond which setting up a company makes sense. Unfortunately, that threshold is way off.

I also contacted a relative who runs a SME for advice. His opinion was that there would be too much admin in relation to my likely turnover.

To those from the US who replied to this post, I think it has been discussed in the forums elsewhere.

Thanks once again,

J Simpson


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xxxAdrian MM.
Local time: 06:21
French to English
+ ...
No duty to keep accounts in the UK Sep 26, 2006

Just one thing to add to Charlie's sound rundown:

though there is no duty to keep accounts in the UK, a sole trader will find it hard to meet tax obligs. without doing so.

Also, if you set up a UK co., there are strict time limits for filing an annual return and accounts for CT/corporation tax purposes. Bear in mind the point at which self-employed or co. social security contribs. and income tax diverge.

Unless you buy an 'off-the-shelf', ready-made co. from company formation agents like Jordans - change name in memorandum of association - you've also got start-up expenses and may also have AGM requirements: calling the other member to a meeting every year.


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