One of the biggest questions faced by freelancers is precisely what kind of organization should they be? Choices are between the status of a limited company, sole trader, or a licensed contractor. The three respective business structures are unique and have several benefits as well as downsides. It is usually up to an individual to make an evaluation, keeping track of all facts and general information related to it.
At this point, it isn’t sure which type of business structure is better in terms of benefits because it rather depends on a professional individual’s prior requirements. Either sole trader status or limited company or like can suit based on how far its core attributes are compatible with one’s situation, along with the degree of a comparative advantage they bring.
Nonetheless, let’s put each business structure in question under a microscope:
A sole proprietorship is not a legal entity separate from its owner. In this case, the business owner personally owns all of its assets and is solely responsible for its operation. The owner keeps all business profits after paying taxes on them. In the case of business failure, the proprietor is handed with responsibility and bears the loss.
An important reason why sole proprietorships are so popular is that they are the easiest and most economical way to organize a business with only one owner. In these types of companies, you must not do anything special or present any document to establish it, in addition to the licensing process, the permit and other regulatory requirements found in your state and location for a business.
The example of a sole trader can be traced to a wide variety of cases, the most popular ones being merchants and service providers in sectors of plumbing, hairdressing, automobile mechanics, etc. As the horizon of sale trading expanded, we now have the structure in other different forms, including internet-based entrepreneurs, self-employed consultants, and freelancers. In the UK, you are not required to register your business with the Companies House, but you still have to become a taxpayer with HMRC.
If you agree to perform specific work for an employer, and you carry out your work according to your process. Outside the employer’s daily control, you are an independent contractor. Independent contractors aren’t considered employees; they work on their own and do not receive most of the rights and benefits that employees receive from their employers or by labour laws.
Unlike an employee, if you are an independent contractor, you set the terms of your employment with each employer, and you own your work. For example, if you are a writer working as an independent contractor, you retain the copyright of your work even after giving it to your employer, unless you explicitly waive your copyright.
Independent contractors work on their own and do not receive most of the rights and benefits that employees receive. For example, as an independent contractor, you will receive remuneration according to the terms of your agreement, not according to a scheduled salary.
The umbrella company is an intermediary between the freelance and the end customer who is responsible for managing invoices, payments, taxes, etc. How does it work? The freelance worker contacts the final client who wishes to hire him either directly, responding to a job offer, or through a recruiter (worker of a personnel selection company).
Once they have agreed on daily rates and the details of the project, the final customer signs a contract with the umbrella company for the provision of the indicated services. The freelancer signs an employment contract with the umbrella company that describes their employment relationship. This contract must only be approved once when you start working with the umbrella company. The umbrella company assigns the project to the freelance.
A business is a system designed to obtain benefits through the performance of an activity, the sale of products, or the provision of a service that we can offer to other people. It refers to how a person or organization obtain money in exchange for products or services.
Some business examples may be a mechanic who acquires a store and tools to earn money by repairing vehicles. Then creates a website to sell cosmetic products online or a news portal that has many readers and sells advertising space to advertisers. Here, each of the businesses is different models and ways to earn money.
Businesses form into companies, and, a company is an entity or organization created by one or several people to obtain money through the production and marketing of products and services to customers. It refers to the legal aspect and the characteristics that the organization has.
Advantages of being a sole trader
Control and ownership
As a single owner, the whole business stake is owned by you. You bring in your own investments and run the business according to your will, strategies, and decisions. There is no intervention from the outside as the company stays entirely in your control. It can have a favourable implication because once you establish a successful venture, you can take steps towards selling it off to a suitable buyer.
Constituted easily and economically
Starting a business as a sole trader does not follow a lot of paperwork or complications. You are exempt from registering your business with Companies House, and the rest of the process of setting up the venture is quite easy as well. At the same time, the sole trading business has a limited scale and therefore, requires minimal initial investments. Most sale traders in the UK can set up ventures by financing through their savings. Depending on your business model, funding your venture with capital is more pragmatic and opens an excellent opportunity for you to delve into proprietorship.
Easy tax structure
In the UK, you are liable to get registered with HMRC and actively pay your taxes. For sole traders, it is relatively easy to do so, and there are not many complications concerning tax that you can face. You are needed to pay tax as well as National Insurance Contributions (NIC) on your earnings.
As a single owner, all profits are directly kept by you and shared by no other business partners, which is an attractive prospect for many business owners who set up their ventures in profitable industries and accumulate huge profits?
As mentioned above, a sole trader is not legally required to register with Companies House. Therefore, the business can keep a lid on information about it. You can achieve greater privacy as no information of activity is needed to be given out.
The downsides of being a sole trader
Difficult to raise capital
Single owners usually rely on their savings or assets to finance their only trader business. For many aspirants, it can be challenging as the growing economic crisis hardly allows an average citizen to sustain their savings, let alone set up a business venture.
Difficult to seek loans
Banks are reluctant to show confidence to single business owners, as they cannot offer any guarantees. At the same time, there is no chance of liquidation and not everyone’s credit history is suitable for loan approvals.
There is no protection in this structure because no legal obligation separates your business from you. It means that you are responsible for paying your businesses’ liabilities or debts in any case. Here, any crisis or failure of a company is treated as a result of the owner’s actions and is fully responsible for it.
No business continuity
In the event of your death, your business can no longer continue unless you fully transfer ownership of a company to another single party.
Recruitment companies do not hire sole traders as contractors
According to the Income Tax (Earnings and Pensions) Act 2003, an agency cannot hire you as a contractor between their clients. Which is because then the agency would have to treat you as an “employee” and in that case, you will be entitled to bear income tax and National Insurance Contributions (NIC) from your earnings. For this reason, employers do not generally prefer hiring sole traders for contractual work.
Benefits of contractual work
It seems obvious, but that could why you are considering this change. As an independent contractor, you don’t have to work for another person. You may be able to set your schedule and complete work assignments whenever you want, depending on the type of work. You should be able to negotiate payment rates and the payment schedule, but you may need to keep an attendance sheet if you work with an hourly rate.
Obtaining a contract
Most employees do not have a written agreement unless they work under a union contract or are highly paid executives. But an independent contractor can always have a deal. Obtain a written commitment from each person or their employer.
Having a contract explains “what happens when”. Having an arrangement can resolve many disputes before they begin, and you can make a deal to court to receive payment, if necessary.
Deduct business expenses
All expenses that you must pay to manage your independent contractor business are deductible to you as business expenses. That includes business trips and the costs related to having a home-based business. Of course, you will have to file a business tax return to get the deductions, but it is worth minimizing your income and income taxes.
No real guarantee of income
As a contractor, you do not receive a monthly or weekly paycheck. You need to work hard to secure clients who would like to work with you, and you get paid only based on work. Sometimes the market is flourishing, and sometimes it is completely damp.
Bear expenses of your business
When working for someone, you get facilities, including a workplace and other assets which you can utilize to carry out your work. Alternatively, independent contractors required investment in all their resources that are fundamental to work there.
An independent contractor cannot enjoy employment benefits like insurance and other fringe benefits. It is because when you are working independently, you do not fall under the legal structure of an employee. Therefore, you cannot avail the benefits which entail by the policy.
Still, pay taxes
Even as a contractor, you need to pay a portion of your income to taxes and National Insurance Contributions.
Pros of establishing a business
Possibility of obtaining large sums of money
Having your own business gives you the option of earning income according to your capacity and effort; unlike a job, where one is limited to the salary assigned to him, which is often determined by people who do not recognize one’s actual performance.
By your own business, one generates money that goes mostly towards oneself, unlike a job, where the highest percentage of cash generated by a worker goes to the pockets of other people.
Most of the rich people in the world began their path to wealth by creating their own businesses.
More free time
Having your own business gives you more free time, but if you can create a sound business system, and the ability to hire the right personnel, and to know how to delegate authority.
By creating a sound business system and knowing how to delegate responsibilities, over time, an own business stops relying on one’s physical presence to continue functioning and growing. That translates into more free time that you can achieve by working for a third party, valuable free time to spend with the family, to create new businesses, or to seek new investments.
Freedom of schedule
When you have your own business, you have more freedom to set your own plans, for example, to decide when to start working.
You can also be absent from your job at a convenient time. For example, in an emergency or to enjoy an important event — without having to ask permission or give explanations to a superior.
Be your own boss
Having a business of your own gives you the possibility of being your own boss, which means not having to be under someone’s orders, especially someone who is most likely less trained.
Being your own boss also means that no one must tell you what you must do, that you can make your own decisions, and not have to be accountable or give explanations to anyone.
Having a business of your own gives you the possibility to use your full potential and learn new things. It gives one the option of applying all their skills, knowledge and creativity and, thus, being able to develop them, for example, by having to face different challenges or challenges; Besides that, it allows you to learn many things.
Something that does not usually happen when you have a job, where it may be that you have challenges or learn many things at the beginning, but as your functions or tasks become repetitive, the routine becomes present, and you stop developing your abilities and learning
In the case of business closure or downturn, your personal assets cannot be liquidated to pay debts and obligations.
Lack of benefits
When you are an entrepreneur, you exempt yourself from many benefits that apply to you when you are employed. For example, medical insurance, retirement savings, paid vacations, sick leave days and personal absence days cease to exist when you are an entrepreneur.
Lack of free time
In general, SMEs have few employees, and you as the owner must be present almost if the business is open and solve all the problems that arise on a day-to-day basis. If you work from home, you run the risk of not dividing work time and personal time.
Increase in liability
By assuming the role of an entrepreneur, you acquire more responsibilities with the government. You must pay taxes, insurance, salaries, premises and other services that maybe you didn’t have as an employee.
It all narrows down to personal choice and personal circumstances concerning what determination of legal status you choose. Being an entrepreneur, sole trader, as well as an independent contractor, has its pros and cons. As a general recommendation, one should opt for a choice where the benefits outweigh the drawbacks.