For freelancers, a limited company is a formal business structure that creates a legal separation between you and your work. It's a distinct entity with its own finances and obligations.
What is Limited company?
A limited company is a legal entity separate from its owner. When you freelance through one, the company itself is your client's legal contractor, not you personally. This structure provides a clear division between your personal assets and your business activities.
Why is this important?
It's crucial for freelancers because it offers limited liability. This means your personal assets, like your home or savings, are generally protected if the business faces debts or legal issues. It also presents a more professional image to potential clients.
How does it work?
You register the company with the government and become a director and shareholder. You pay yourself a salary and potentially dividends from the company's profits. The company pays corporation tax on its profits, and you must file annual accounts.
Pros and cons
Key advantages include limited liability, potential tax efficiency, and professional credibility. The main drawbacks are increased administrative work, compliance costs, and more complex accounting requirements compared to sole trading.
Conclusion
Forming a limited company is a significant step for a freelancer, offering protection and structure. It's best suited for those with higher earnings who are ready to handle the added administrative responsibilities. Always seek professional advice to see if it's right for your situation.
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