So you’re thinking about forming your own interior design business? Excellent: now is a great time to start. With booming social media channels like Pinterest and Instagram making it easier to share engaging imagery, there is a growing interest in creating and showing wonderful, vibrant homes. What’s more, social media makes it much easier to promote your services online and reach the people who need your help.
However, while turning your creative outlet into a business is easier than ever before, there are still some important formation aspects to consider before you launch. Specifically, deciding whether to form a limited company or register as a sole trader. While this may seem like a difficult decision, we’ll take you through the different ways you can trade, and ultimately help you to decide the best option for your business.
Limited company vs sole trader
Starting out as a sole trader is simple: you need to notify HMRC, register for self-assessment and file a tax return. You’ll have a legal duty to keep records of your business income and expenses, and you’ll need to register for VAT if your annual turnover exceeds £85,000. As a sole trader, you can choose any business name you want, but you’ll need to check that the name you want isn’t in use already. You may want to register a trademark to protect your business name and image.
On the other hand, a limited company is a business that has been registered at Companies House. Unlike sole traders, limited companies are completely separate from their owners, which means that owners can enter into contracts under the company name, leaving the business itself responsible for its own actions, finances and liabilities. Although setting up a limited company may seem like the more daunting choice, it isn’t as difficult as it seems. Again, you need to check that the name you want to use isn’t already in use by a registered company, which you can do here. Then you need to register the company: after which you’ll be up and running within a few hours.
You can read our dedicated article to the more finite informational differences right here.
Finances as a LTD vs Sole Trader
Before you register, however, it’s important to weigh up the differences between the two options. As a sole trader, there is little distinction between you and the business, meaning that any business debts accrued become your own personal debts, and your personal assets — including your house, if you own one — are not protected. This isn’t the case for a limited company, however, as company owners are protected under limited liability. This means they’re only responsible for business debts up to the value of their investments or what they guarantee to the company.
The benefits are clear to see for either setup, but for an interior design company, which is more suitable? The answer depends on how you start out. If you’re solo and working on a freelance basis then setting up as a sole trader is the route you should probably consider. From a financial point of view, it’s just more manageable.
However, if you’re starting up with a team and an existing portfolio of clients, you might want to consider setting up as a limited company as banks tend to favour these when considering loans — if you need to rent an office space, for example. This also means your interior design company could receive the investment you need to spend on all-important startup equipment like computers, photography equipment, software or even marketing.
Tax as an LTD vs Sole Trader
There are also important differences between setting up as a sole trader or as a limited company when it comes to tax. If you’re a sole trader, you pay tax on your business profits via the HMRC self-assessment tax return system. You will need to submit a tax return every year or hire an accountant to do it for you. The deadline for online tax returns is 31st January after the end of each tax year.
If you opt to set up a limited company, however, you have more options about how you draw income from the business. You may decide to take a small salary where tax is deducted via Pay As You Earn (PAYE) and paid at regular intervals to HM Revenue & Customs (HMRC). Your salary will be taxed at a rate depending upon how much you earn: find up to date figures here. You can then take profit from the business as dividends which are subject to a different rate of tax. For limited companies of any size, corporation tax is charged at 19% from 1 April 2017.
You might consider seeking specialist accountancy advice to decide which option would be most beneficial to you. However, again, think about whether you want to form on your own or as a partnership. An interior design startup can be undertaken by a single passionate man or woman from their own home, for instance. All you need is your laptop, a place to sketch and your creativity. If this is you, then forming as a sole trader could be the way to go — not having to register for VAT until you earn £85, 000 is also a huge attraction, of course.
The amount of National Insurance (NI) you need to pay also varies depending upon which formation type you choose. As s sole trader, you would pay Class 2 NI contributions of £2.95 per week and Class 4 contributions on profits in excess of £8,424 (rates accurate for 2018/19). However, under current plans, Class 2 NI contributions will be abolished from April 2019. If you set up as a limited company, both employer and employee National Insurance (NI) are payable on directors’ salaries and bonuses, which may lead to an overall higher charge.
For interior design startups then, it looks like sole trader represents the strongest option here, especially with the abolishment of Class 2 contributions in 2019. Again, however, it depends if you intend on employing people right away.
If you want to promote yourself as the business, and you look at each of these examples individually, being a sole trader can work really well. However, if you plan to eventually hire a team of designers, you may want to think about forming as a limited company from the start. A company can allow you to establish a clearer brand identity, which is especially important within the interior design industry in order to stand out as reputable.
Trading as a limited company can also offer you a more professional image. Since you have been through a process to register your company, it can give the impression of a professionally run organisation. This is useful in certain sectors, such as designing corporate office interiors, as some enterprises may not work with sole traders due to the legal protection a limited company provides. Additionally, when trading with larger companies, say for example a major furniture manufacturer, you may find that they prefer to deal only with established companies.
Whichever formation option you decide on for your interior design business, make sure you weigh up your options first and how you intend to develop. If you’d like some assistance in starting the formation process for yourself, we offer a range of register a limited company packages that make the process a little easier. To learn more about the next steps for your business, see the rest of our advice hub.