Sole Trader, LTD Company or Umbrella Services?

If you're currently in the process of making the decision between being permanently employed or taking the leap into the potentially turbulent world of contracting/freelancing then there are a few things to consider before you commit to becoming self employed.

1. Advantages/Disadvantages of being a Sole Trader

Advantages

• Quick and easy to start
  
• Simple record keeping (it must however be proper accounting records)
  
• Keep all profits (after tax)
  
• No costs unless you employ a Bookkeeper/Accountant
  
• You are not required to charge your customers VAT unless you go over the the £64,000 threshold
  
• Keep all the profit – as the owner, all the profit belongs to the sole trader.
  
• Business affairs are private, competitors cannot see what you are earning

Disadvantages

• Liable for all the money our business owes
  
• Personal possessions at risk
  
• Taking time off could be a problem
  
• Holidays and sickness are unpaid
  
• Loss of some social security benefits

2. Advantages/Disadvantages of being a Limited Company

Advantages :

• Wider range of expenses, ie. accountancy fees, equipment and software costs
• Having complete control over your financial affairs.
• Separate Legal Identity
  
• Members' liability is limited ("limited liability")
• Protection of Company Name
  
• Better Pension Schemes
  
• Less risk to personal and family assets

Disadvantages :

• There is a setup cost involved
  
• Higher paperwork burden
  
• Having an Accountant is usually advised
  
• Keeping track of expenses requires discipline
  
• Other people, including your competitors can see your accounts and other information that you are obligated to file at Companies House.
  
• If you are over the audit threshold, you will also have to pay to have an audit.
  
• You will have to deal with Corporation Tax as well as your personal tax situation.
  
• Costs are incurred wether you are in work or not

3. Advantages/Disadvantages of Using an Umbrella Service Company

Advantages :

• Significantly reduced administration and paperwork
• You only need to send your timesheet and expense details
  
• Tax and NI are deducted before you receive your money
  
• Works well for short or long term contractors
  
• Compliant With Legislation
  
• Tax Efficient
  
• You only pay fees while you are working.
  
• IR35 Compliant
  
• Invoices issued to Agency/Client.
  
• Processing of PAYE/N.I. payments to HMRC.
  

Disadvantages:

• More expensive way than doing your tax and NI yourself
  
• You are reliant on the umbrella company to collect your money from the client or agent and then pay it on to you
  

If you are planning to use an umbrella company then you need to ask three key questions:

a) What exactly will they charge b) How long have they been trading for? c) and what services/benefits do they provide?

Answers in the case of Paycheck Services LTD

a) Fees from as little as £10.20 (netted down) per week
b) Paycheck Services LTD was established in 1997
c) IR35 Compliant Umbrella Service

• No additional Tax liabilities
  
• Approved HMRC Tax free expenses
• Fast Set Up - 24 Hours
• Dedicated Personal Consultant
• 100% Compliance With Legislation
• Tax Efficiency
• Quick Pay
• APPROVED HMRC DISPENSATION, Enabling you to claim legitimate business expenses
• Your Own Personal Payroll Consultant
  
• Fast and Simple to Set Up
  
• Exclusive Member Benefits
  
• Invoices issued to Agency/Client.
  
• Processing of PAYE/N.I. payments to HMRC.
  
• Production of individual payslips with breakdown of all deductions.
  
• Completion of P60’s and P35’s at the end of the financial year.
  
• FREE Mortgage/Loan references
  
• FREE Employer references
  
• Routine, worry Free, payment by BACS/CHAPS making life easier, for you, the contractor.
  
• Daily Pay Run - Our payment schedule matches the Agency/client. We credit your bank account the same day as the money arrives with Paycheck.
  
• Prefer to receive your money by cheque – not a problem. The choice is yours.
  
• Holiday fund available – Helping you to save your money

4. How to maximise your income

In terms of your ability to maximise your income, becoming a Sole Trader or forming a limited company is the most attractive option, allowing you typically to take home over 80% of what you earn; this compares favourably with umbrella services but depends on the needs of each individual. If you have the time and discipline to chase money, record expenses whilst keeping within the correct legislation then becoming a Sole Trader/Limited Company may be for you, however if you dont want the hassle of managing your finances, chasing money, invoicing etc and would prefer to spend more time earning money then an Umbrella Company could be the perfect solution for you.

5. How can you enable your clients to deal with you easily and make payment swiftly

In this day and age there is a wide variety of payment methods, the quickest being BACs, CHAPs or Card Payment either with a PDQ machine in person or over the phone. However, to be able to process these methods of payment can be quite costly so it is unlikely that as a sole trader you would have these methods of payment. Larger LTD companies can usually justify the cost of these facilities to ensure that their customers can make payments quickly and easily however, should you be a one man band then it is highly likely that you will have to be paid via cheque which takes three days to clear once you have been able to get to the bank to pay it in or paid in cash in which case you need to ensure you make accurate records the same day so that you don't forget. Umbrella Companies are usually able to accept the more instant type of payment methods and the good ones even send the money on to you the very same day.