One common misconception many freelancers and sole traders believe is that they are required to register an LLC to trade. However, nothing is farther from the truth as in fact, registering a company when trading as an individual comes with very little advantage and may even result in headaches and compliance costs! Read on to find out if registering a company is good for you as a freelancer or contractor.
Freelancers, company, business, contractor, sole trader
Do you know the difference between a business and a company? A company is an entity that’s registered with the Companies Office and has Directors and Shareholders with its own set of tax and compliance requirements – separate from the owner as an individual taxpayer. A business, on the other hand, is a trading operation where goods and services are sold, therefore you can run a business as a sole trader, contractor or freelancer.
As a Director of a company, you would need to maintain the tax affairs and records of the company in addition to your responsibilities as a Company Director.
Payroll, accounting, GST
If you’re a self-employed contractor, sole trader or freelancer, you won’t need to register a company to carry out your business as an individual. You can still register for GST, claim business and home office expenses, raise invoices, depreciate assets, hire staff, etc. Often, you will only need to register a company if you have certain complexities in your business like having permanent staff, complex inventory, creditors, or multiple Directors. To manage a company, you will likely need accounting and payroll software, and management tools.
You might’ve heard that registering a company will reduce your risk but that is not necessarily the case. If your business has a lot of creditors, using a company structure can give you a certain level of protection in case your business is forced into bankruptcy but you would still be at risk of litigation as a Director. Most freelancers and contractors don’t have creditors though, as they often earn from time spent and have no risk of defaulting on
fixed goods orders, so if you’re a contractor or freelancer in a risky industry such as one with possible accusations of malpractice, you can simply take out a Professional Indemnity and Public Liability Insurance policy, which is so much cheaper and more efficient than registering a company.
Company tax
Your tax rates are also the same regardless of whether you’re an individual or a registered company. Yes, Corporation Tax is at 28% while the individual top tax rate is 39% but this doesn’t mean you won’t be required to pay tax by earning through a company.
People used to register a company to pay themselves minimum wage before taking dividends out of the company to lower tax rates but IRD has already clamped down on these tax avoidance practices many years ago.
If you’re already a registered company but would want to trade as a sole trader, you can just make the company dormant and proceed to trade as an individual. If your business grows, you can revive the company if you wish to. You can also just close the company and trade as an individual if you think you won’t need the company in the future.
Accountants for contractors
Bet you have a lot of questions! Speak to your Outside go-to here to find out more!
Your Outside Team
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Te Aro, Wellington 6011, New Zealand
Mail: PO Box 24-457, Wellington 6142
Phone: 04 889 2975
