Sole Trader to Limited – Freelancer Case Study

Danielle is a freelance marketing contractor living and working in London. She set up in business in 2004 after being made redundant from an agency which was closing down, and then operated very successfully as a sole trader until 2007. With three years of freelancing success behind her, Danielle started to look at ways in which she could make more money than was possible simply through charging for her time, and also started to think about her long-term future and what kind of exit strategy she might plan for further down the line.

“I always thought that working as a sole trader would be enough for me”, she explains. “To start with everything was very simple, but over time it became more complicated. I’d toyed with the idea of becoming a limited company in the past but the prospect of all that extra paperwork and the legal obligations just terrified me if I’m honest. It seemed simpler to stick with the sole trader option, which suited me at the time – and if I ended up slightly worse off then I decided that the positives still outweighed the negatives.”

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It was only when Danielle decided to change her business model slightly that she began to think again. After talking with John, a family friend who is also a business coach, she realised that it could be time to look at ways of making more money than could be achieved by just charging an hourly rate. By buying in design and print services for her clients and then adding a small markup and selling them on, Danielle was able to bring in extra revenue without actually having to work extra hours. And her clients were still happy as they had just one supplier to deal with, as she explains:

“It’s more of an agency model, which is not something that I was brave enough to consider right at the start. John convinced me to give it a try and then pointed out that I might need to re-think how I managed my finances in order to ensure that I didn’t expose myself to any unnecessary risk. Because I’m now buying these services from my suppliers I’m liable for the payments, even if something awful happened and my client didn’t pay.”

Moving from sole trader to limited company

"The implications of being a sole trader in that environment started to seem a little risky, and so John suggested that I consider forming my own limited company. Understanding my concerns about paperwork and legal liabilities, he suggested that I talk to a specialist firm of accountants who were experienced in dealing with freelancers. After a quick Google search, I found the SJD website and was amazed by the volume of free information available. It was like an Aladdin’s cave, every question I had was answered, and in plain English too. And I soon realised that there was a huge range of other benefits to be gained by going limited, that I’d never even thought about before, such as:

Better tax planning options

I’d never planned on opening offices across the country or employing tens of thousands of people. However, as I understood it, through a limited company I did have the option to leave money in the company and not pay tax on it. For example, if I earned £50,000 this year but only chose to take £35,000 out and then go travelling for six months – and then next year I earned £25,000 (plus the £15,000 that I left in the business) it meant that I wouldn’t have to pay the higher tax rate. As a sole trader I’d pay tax on the whole £50,000 in year one.

I discovered other tax planning benefits as well, such as ‘entrepreneurs tax relief’ but those sounded far more complex and I decided I’d need to chat them through with an accountant when the time came.

More professional appearance

The website mentioned that some limited company and PLC clients preferred to deal with other limited companies rather than sole traders, and this is certainly something I’ve found over the years.

Exit plan

If I could build my business up to a position where it became a valuable asset with a good selection of regular clients, the chances of selling it would definitely be higher if I had a limited company.

So essentially, I’d pay less tax, have more tax planning options, look more professional and maybe be able to sell my business at some point. Yet it wouldn’t cost any more or take more time to manage or administer. I was beginning to wonder why I hadn’t gone limited from the very start!

The SJD website was such a revelation. Within fifteen minutes I knew that they would be able to help me and I picked up the phone straight away. Their customer services department was brilliant. I got straight through and didn’t have to sit on hold or press any silly buttons to select different options. I just spoke to a real person who was able to give me real advice. What a result.”

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Having listened to all of Danielle’s queries and provided the necessary answers, SJD helped her through the process of setting up her own limited company online, then and there. The customer services team then put Danielle in direct touch with her own dedicated accountant and arranged a face-to-face meeting the following week to go through everything in more detail.

Danielle signed up for SJD’s fixed fee accountancy service which provided her with unlimited direct access to accountancy help and advice, as well as all her personal taxation services and the completion of year-end accounts, VAT returns and annual returns. In fact, it included everything Danielle needed, as she concludes:

“My tax affairs are now very simple and my accountant is always on hand. I know I can meet up with him at any time, all included in the fixed fee. I don’t get charged for additional things like tax reminders, telephone calls or emails. It’s all been so straightforward and I realise now that setting up a limited company was nothing to worry about at all. SJD take care of everything for me and they even deal with the tax office and Companies House on my behalf as well.

Now that I have my limited company it gives me far more flexibility and security as I develop my business model, and it also means that my business could be potentially saleable at the end of the day, which is always good for the long-term early-retirement plan. I only wish I’d taken the plunge and gone limited from the very start!”

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