Switching from freelancer to business owner6 Aug 2018
Freelancers are driven by many of the same motives as business owners. They want to be their own boss, do things their way and take control of their own future. The big difference is that as a freelancer, there is a limit to how much one can grow a client base, with only so many hours in the day, and only so much they can charge for your time.
Plenty of freelancers are totally fine with this arrangement; happy with the flexibility and control it gives them over their schedule and how they work. There are others, however, who end up craving something bigger, whether that’s a desire to make more money, work on larger projects, or build a team around them.
If you reach that point, it’s a good sign that you’re ready to make the jump from freelancer to business owner.
Of course, making the transition can be pretty daunting. So, where do you start?
As a leading small business accountant in London, our team of experts are fully equipped to analyse and understand your business and help establish yourself among the limited company ranks, as well as guiding you through the incorporation process.
Get in touch to discuss how we can help you on your new business venture and make your next step a successful one.
Preparation is key
Freelancing provides you with some of the skills and attributes you’ll need as a fully-fledged entrepreneur, such as self-motivation, business development and being aware of your tax affairs.
But it’s important to be aware that running a business isn’t just an extension of being self-employed, bringing loads of extra responsibilities on top of your core service.
You’re likely to face a steep learning curve in areas such as finance, leadership, hiring and firing, managing a team and marketing your brand. You should also expect to take a hit on earnings – at least initially – while you juggle hiring staff, putting processes in place and building up your client base.
All these new challenges mean it’s wise to do plenty of research before you start, to ensure you understand the challenges in your particular industry, as well as how you can stand out from existing businesses.
Try to have a chat with some people who have done it before, as they’re sure to have plenty of advice about the biggest pitfalls and how you can make it a success of your new venture.
Also, don’t forget to check out software that can streamline processes and can simplify or automate certain tasks, everything from managing your accounts with cloud accounting software to solving HR issues such as absence management and holiday booking.
Break it into stages
If you’ve got more work than you can handle as a freelancer, a good first step can be to find another freelancer or contractor to support you in the short-term – allowing you to take a cut of 10 or 20 per cent on their fees. Doing this enables you to handle bigger projects, while also developing the processes and plans you need to take the next step.
Review what you’re offering
Chances are that as a freelancer you’re a technical specialist in one or two key areas, whereas as a business you have the opportunity to expand your offering.
So, if you are an expert copywriter, you could look to develop a variety of content services around that, by bringing in designers, videographers or SEO specialists.
Providing a one-stop-shop for clients will give you the potential to win bigger and more interesting projects, and of course command higher budgets.
Make your first hire
Without employees, you are technically still freelancing, so hiring your first member of staff is a great milestone.
Think carefully about the skills you need based on the kind of business you want to build, and the areas where you and your co-founder are lacking. For an agency model, a good strategy is to hire talented junior staff who can be trained up and nurtured in line with your business ambitions.
However, you may also require some more specialist skills to enable you to offer a more integrated service.
Either way, you’ll need to put some recruitment and training policies in place quickly, including job specifications, employee contracts and benefits packages.
Also think about whether you want to share business equity with early hires, as this can provide an additional attraction and incentive.
Is your business scaleable?
A lot of freelance models are based on being very good at one particular activity, and then charging for the time it takes to deliver. But, in order to make a more scaleable, profitable business, you could look at moving away from this model, to creating a product or service to sell for a fixed price.
That could be packaging a number of services up and charging per project, or developing a monthly retainer. Alternatively, you could look to build a new tool for your sector, which can be licensed or sold as a subscription.
So, if you’re a self-employed car salesman, that could be developing a piece of software, or an app, that disrupts the current second hand car market.
While this might be a greater departure from what you do now, the reward is likely to be greater scaleability and revenues in the long-term.
Tax for a limited company
On the less exciting side of things, as an employer you have certain legal obligations that you didn’t have as an independent professional, so make sure you have these ticked off. For instance, you need to register as an employer with HMRC, which gives you a new tax position and ultimately affects how you get paid.
A limited company pays corporation tax on taxable profits at a rate of 18% from 1 April 2018 (previously 19%), over and above this there can be personal income tax to be paid with regard to dividend extractions from the business.
In order for the extractions to be as tax efficient as possible the director normally would draw a small salary from the company within their personal allowance but not above the point at which national insurance becomes payable, this salary would be an allowable business cost for corporation tax so 18% corporation tax is saved on the gross salary.
The remainder of their withdrawals would be in the form of dividends, these are paid out of post-tax profits and are not deductible expenses for corporation tax purposes so offer no tax saving, however there is no national insurance to pay on dividends.
In the 2018/19 tax year dividends are taxed at 7.5% in the basic rate of tax up to £46,350, with rates of 32.5% on dividends between £46,351 and £150,000 and an additional rate of 38.1% on dividends which exceed £150,000.
The first £2,000 of dividends that would otherwise be taxable at the above rates are currently subject to a tax free allowance, otherwise known as the dividend allowance.
There is no requirement for the owner to withdraw all profits from the business if they do not want to, and indeed it can prove tax efficient to leave some profits retained in the company for extraction at a later date or to re-invest in the company (e.g. to invest in equipment or staff).
But with a quality business plan you’re in it for the long-game and know what to expect, while also having the potential to be infinitely more rewarding. This gives you the chance to build something bigger than yourself, learn tonnes of new skills and create jobs for other people.