Setting up your business

THE OPTIONS

There are four main ways that your freelance business could operate.
These are:

1. As an employee of an agency
2. Being self-employed
3. As an employee of an umbrella company
4. Setting up your own limited company

AGENCY EMPLOYEE

This is the easiest option - but in reality, it has little or nothing to do with running your own business. It may suit you if you want a flexible career and varied work experience, or if you want to try out the freelancing lifestyle without making a major commitment. It may also suit you if you see freelancing only as a very short-term option. However, if you are serious about a freelancing career, then being an agency employee is unlikely to be the best long-term option for you.

SELF-EMPLOYED

This is generally the simplest way of being your own boss. The paperwork is quite modest, and therefore your accountant's fees will be less.

Unfortunately for many freelancers who work through an agency or do a lot of work for the same company, self-employment is not an option. This is because the HMRC will often argue that you are actually an employee of the company (or agency) you are working for and not a self-employed freelancer at all. Unfortunately, the taxman has heard (and rejected) most of the arguments freelancers dream up to defend their self-employed status. So arguing with the HMRC will usually be a lost cause, unless you can satisfy a long list of conditions that could make you genuinely self-employed in their eyes.

But even if self-employment is not an option for you, don't lose heart - there are still two more options available to you that allow you to ‘be your own boss’.

UMBRELLA COMPANIES

Some freelancers opt to join an umbrella company. Under this type of arrangement, you are employed by the umbrella and have some scope to reduce the amount of tax and national insurance you pay. There is also less paperwork than when you have your own company. There will be a service charge for using the umbrella company - and this could work out to be more expensive than running your own company. As a result, umbrella companies are probably most suitable for short-term freelancers, or those who want to experiment with freelancing.

LIMITED COMPANY

This is by far the most common way for freelancers to be in business, and almost always the most tax efficient. Essentially you set up, own and run your own limited company. You will usually appoint yourself as a director (the Managing Director if you like) and be the major shareholder.

In the eyes of the law, the company has a life of its own. For example, it will actually be your company that enters into contracts, and not you. In most cases it will also be the company, and not you, that is responsible for its own debts. What this means in practice is that if the company gets into difficulty and goes bust, you shouldn't lose your house or other property, this is because you have what is known as "limited liability". Many people find that this gives them real peace of mind and allows them to sleep more easily at night.

You will be in complete control of the company. But of course, this position of power also brings with it responsibilities, many of which are not at all obvious to the first-time company Director. For example, if you act dishonestly or recklessly, for example, buying something you know the company can't afford, your house and other property could still be at risk. Therefore it is essential to take professional advice to make sure that your limited company is more of an asset than a liability.

More on running your business and limited companies.