Small business owners have set up a limited company owners to protect their family home.
The choice between operating as a sole trader or setting up a limited company can have significant implications for freelancers and startup founders. One key factor driving many freelancers towards the latter is the enhanced protection it offers for their personal assets, including their family home. Additionally, an increasing number of clients are showing a preference for working with freelancers who operate through limited companies, due to the perceived lower risk associated with indemnity claims.
Protecting Personal Assets: The Limited Company Advantage
A fundamental distinction between sole traders and limited companies lies in their legal structures. A sole trader’s business and personal finances are intertwined, meaning their personal assets – including their home, car, and savings – are potentially at risk if their business faces financial difficulties or legal action.
In contrast, a limited company is a separate legal entity from its owner(s). This separation provides a crucial layer of protection for personal assets, as the company’s liabilities are generally not the responsibility of its shareholders or directors. This means that in the event of the company facing insolvency or legal claims, the freelancer’s personal assets, including their family home, are generally shielded from creditors.
Client Preferences: Indemnity and Risk Mitigation
Many clients, particularly larger corporations, prefer to engage freelancers who operate through limited companies. A key reason for this preference is the reduced risk associated with indemnity claims.
Indemnity clauses are common in client contracts, and they essentially hold the freelancer liable for any losses or damages incurred by the client as a result of their work. If a freelancer operates as a sole trader, their personal assets could be at risk if an indemnity claim arises. However, if the freelancer operates through a limited company, the liability is generally limited to the company’s assets, further protecting the freelancer’s personal finances.
As Dave Chaplin, CEO of IR35 compliance firm IR35 Shield, points out, “Sir Bradley Wiggins is one of many individuals who was told by broadcasters that they could only obtain work if they operated through a limited company…The practice was adopted to shift the potential liability of employer’s National Insurance to the individual.”
This highlights how client preferences for limited companies are often intertwined with complex tax and liability considerations.
The Bottom Line
While setting up and running a limited company involves additional administrative tasks and costs compared to operating as a sole trader, the benefits in terms of asset protection and client appeal are often substantial. The peace of mind that comes with knowing your personal assets, including your family home, are safeguarded is invaluable. Additionally, the ability to meet client preferences and secure lucrative contracts can significantly boost a freelancer’s earning potential.
However, Chaplin also warns that the landscape is shifting, with some firms now “blanket banning the use of limited companies, often forcing individuals to operate via unregulated umbrella companies.” This reintroduces the original issue of individuals shouldering the firm’s employer NI bill, and in worse scenarios, facing significant tax liabilities due to non-compliant umbrellas.
In conclusion, the decision to operate through a limited company rather than as a sole trader is a strategic move for freelancers seeking to protect their personal assets and enhance their professional standing.
As Chaplin notes, “It’s crucial that we find a balance that protects workers’ rights, ensures fair taxation, and maintains business flexibility.”
As the freelancing landscape continues to evolve, freelancers need to stay informed and adaptable to navigate these complexities and build a successful and sustainable career.
Sir Bradley Wiggins recently spoke to Lance Armstrong on “The Forward Podcast with Lance Armstrong” and touched on his time with Team Sky when as a self-employed person he was “deemed employed” by the broadcaster and faced a hefty tax bill (at 13m 21sec in:):
IR35 is an absolute scam. The amount taken by the umbrella company for their ( unwanted) ‘services’ means that taking the role is often not viable. Not only do I have to pay the umbrella company costs, I have been charged employer and employee tax and even been expected to pay the apprenticeship levy!! In the background, I still have all of the overheads of running my business, costs which an employee does not have to carry. IR35 removes any benefit of being freelance, you may as well be be an employee with all of the rights and benefits which employment affords and none of the effort running a business entails. When I see some of the rates offered together with the words ‘ inside IR35’ I think ‘you’ll be lucky’. I have seen rates as low as £150 – 200 inside IR35! The proverbial supermarket shelf stacking would be more lucrative. Freelancers and contractors provide a valuable, flexible and specialist service, yet George Osborne’s wheeze in bring in IR35 has done nothing but destroy that market.