Going self-employed is a big step. Yet an increasing number of people, many driven by the pressures of a depressed employment market, are taking that step and setting up as freelancers and contractors.
Self-employment is seen by many as a particularly attractive option; you are your own boss, you can find your own niche – and, crucially, there is no chance of being laid off.
If you are thinking of going self-employed for the New Year, there are a few important things to think about in advance.
How will you pay the mortgage?
Perhaps most importantly, you must work out how you will tide yourself over until you start bringing in cash from self-employment. There will almost certainly be a gap between leaving your job and the payment of your first invoice, and you will need cash reserves to help bridge it.
Some people feel confident taking out a personal loan, however you should build a repayment plan into your business plan and be confident that even if your venture doesn’t work you can still meet the loan costs. Saving as much as you can while still employed is the most reliable method of funding your self-employment, so work out how much you will need and how long it will take to save it. You can also use this time to work on other preparations.
What will you do?
On a more fundamental level, you should also think carefully about what it is you intend to do as a self-employed individual.
You may find it useful to think of yourself as a small business; in order to be successful you must provide a product or service that people want. If you are leaving conventional employment, but intend to do similar work as a self-employed person, you may well be able to leverage existing contacts and acquaintances.
But if you are entering a new field in which you are not already known, you must think very carefully about how you will secure work. Have you considered marketing strategies? The newly self-employed have to work particularly hard to find work, and it is important that you consider the means by which you will do this.
Where will you work?
Your location will, in great part, depend on the nature of your work. For example, if you are opening a retail business you will obviously have to secure suitable premises. However, many self employed people find that they can work from home. This is a cheap, reliable option for those getting a business off the ground.
You should remember, though, that you may need to pay business rates if you intend to use part of your home as business premises. This decision is left up to the discretion of your local rate-charging authority, so you should contact them if you are in any doubt.
You may also consider serviced offices. These are cheaper and more flexible than a conventional office lease. They come furnished and ready for you to move in – indeed, many come with a phone line and internet access. You may wish to read our article on serviced offices for more information.
Think about the legal structure
As a self employed person you have a number of legal structures from which to choose. The three main options are:
This is the simplest way of setting up as self-employed; the process takes a matter of minutes, and involves a single phone call to HMRC.
Under this arrangement you will make all of the decisions concerning the way in which your business is run, and any profits will go straight to you. These will be treated as conventional income for tax purposes.
However, you will be solely and entirely liable for any debts you run up. This is the major drawback of the sole trader arrangement.
A limited company is treated as a legal entity separate from its directors or shareholders. You may choose to set up a limited company and become the sole shareholder. Under this arrangement your liability would be limited (hence the name) to the amount you initially invested.
Profits generated by limited companies are subject to corporation tax. However, you would be able to choose whether to draw your income as a salary or as dividends. This presents potentially significant tax savings.
If there is another person with whom you wish to go into business, you may choose to set up a partnership. In a conventional partnership, the partners will be treated as self-employed individuals and any liability for business debts will be shared amongst them – as will the profits.
On the other hand, a limited liability partnership would be treated as a separate legal entity, just as a limited company is. Limited liability partnerships and limited companies must be incorporated at Companies House.
Remember to register
You have a legal responsibility to register as self employed within three months of your first month of self-employment. The process is very easy; you simply need to phone HMRC’s Newly Self-Employed Helpline on 0845 915 4515. You will need to provide them with your National Insurance number, current address, and the date on which you became self-employed. Failure to register by this date will result in a financial penalty.
Self-employment seems like an increasingly sensible option in the current, unstable economic climate. The idea of controlling your own career is an alluring one. If you are willing to sacrifice the guarantee of regular income in order to become your own boss and make sure that you deal with the administrative demands from the outset, it could well be one of the best choices you ever make.