When you’re first starting out as a contractor, it can be difficult to decide which business structure is right for you. There are three main options to consider: sole-trader, umbrella contractor, and limited company.
Each business structure has its own advantages and disadvantages, so it’s important to choose the one that best suits your individual needs. Here is a brief overview of each option:
Sole-trader (self-employed)
A sole trader is a business that is owned and operated by one person. This is the simplest and most straightforward business structure, but it also comes with the most personal liability. As a sole trader, you are personally responsible for all of the debts and liabilities of your business.
Advantages of being a sole trader:
- Easy to set up and manage
- Low upfront costs
- You keep all of the profits from your business
Disadvantages of being a sole trader:
- You have unlimited personal liability
- You have to pay your own taxes and National Insurance contributions
- You may not be eligible for certain benefits, such as statutory sick pay and maternity leave
Umbrella contractor
An umbrella contractor is a contractor who works through an umbrella company. The umbrella company acts as the contractor’s employer and takes care of all of the associated administrative tasks, such as payroll, tax, and National Insurance. This can be a good option for contractors who don’t want to have to worry about the administrative side of running their own business.
Advantages of being an umbrella contractor:
- You don’t have to set up your own business
- You don’t have to worry about payroll, tax, or National Insurance
- You may be eligible for certain benefits, such as statutory sick pay and maternity leave
Disadvantages of being an umbrella contractor:
- You will pay a fee to the umbrella company
- You may not have as much control over your finances as you would if you were a sole-trader or limited company
Limited company
A limited company is a separate legal entity from its owners. This means that the owners of a limited company have limited liability, which means that they are not personally responsible for the debts and liabilities of the company.
Advantages of being a limited company:
- Limited liability
- You can pay yourself a salary and dividends
- You may be able to corporation tax at a lower rate than income tax
- You may be able to access a wider range of financial products and services
Disadvantages of being a limited company:
- More complex to set up and manage than a sole trader or umbrella company
- Higher upfront costs
- You have to file annual accounts with Companies House
Which business structure is proper for you?
The best business structure for you will depend on your individual circumstances. If you are just starting out and you don’t have a lot of money to invest, then being a sole trader may be the best option for you. If you want to limit your personal liability or you need access to a wider range of financial products and services, then being a limited company may be the best option for you. If you want to avoid the administrative hassle of running your own business, then being an umbrella contractor may be the best option for you.
MyPOM can help
If you are not sure which business structure is right for you, then MyPOM can help. We offer a range of services to support contractors, including advice on business structures, accounting, and tax.