What
Whilst most first-time freelancers will opt to register as a sole-trader - there are other options which might suit your industry and way of working better.
Take some time to understand the differences, so you can make an informed decision.
Why
Understanding the differences between “sole-trader” and being a “limited company” director is important, as they have different benefits and risks, administration responsibilities and implications for tax.
Most freelancers will choose registering as a sole-trader, but you can also choose to form a limited company.
Some sectors and clients prefer working with freelancers who are registered as a sole-trader, some prefer working with limited companies. It’s important to do some research to see which is more common in your chosen industry.
Important to know
In 2023, of the 5.5M small businesses with 0-49 employees in the UK: 56% are sole-traders*.
Technically, you are only classed as “self-employed” for tax purposes when you’re a sole-trader (or in a partnership).
If you’re registering a limited company, where you are the sole owner, director and employee - you are not self-employed from a tax perspective, although many people who run one person limited company will describe themselves as self-employed.
“Freelancer” has no standard definition or meaning for tax purposes - so you can be a sole-trader, the director of a limited company or a number of other alternatives.
You are able to start as a sole-trader and then start a limited company later on, if you decide that is more appropriate.
It’s entirely possible that you may have multiple forms of income when you’re self-employed: as an employee (under PAYE via umbrella companies or direct with an employer under contract), as self-employed (responsible for paying tax via self-assesment) and as a director of a limited company (as an employee of your own business).
It can be complex, and having an accountant to advise you can be beneficial.
How
1/ Read some of the guides from the ecosystem to understand the differences, advantages and drawbacks of the various forms of starting a business.
2/ Speak with fellow freelancers in your industry, and understand the situation in your particular sector - what is the most common form of working.
3/ Consider speaking to an accountant who specialises in freelancing or small businesses to get their input.
4/ Remember, that nothing is forever - even if you register as a sole-trader or start a limited company, you can change your employment status at a later date.
