Business Structure

The type of business structure you operate under will often depend upon the client that you're working with. The 3 that I'll talk about here are: Umbrella Company, Sole Trader and Limited Company. I've made use of all 3 at one time during the last 18 years of my career.

Umbrella Company

An Umbrella Company is often used by recruitment agencies to pay temporary workers.

Effectively, you become an employee of the Umbrella Company on a short-term basis and they pay your wages through PAYE (pay as you earn). The Umbrella Company does not find the work for you, this is the job of the recruitment agency but they often work closely together because it serves both of their financial interests.

My first experience of contracting was in March 2006. The Royal Bank of Scotland had need for a temporary web developer in their HR web team. I had been contacted by a recruitment agency about the opportunity - a three month contract paying £30 per hour if I remember correctly.

In this instance, the recruitment agency were the Umbrella Company but sometimes they're not.

Some clients check if off-payroll working rules (IR35) apply to a job. This happens when workers are hired through their own company or another middleman. There's a tool called "check employment status for tax" that helps clients figure this out.

If a client thinks these rules apply to a job, the job ad might say it's 'inside IR35'. This means you could be treated like an employee. The client or recruitment agency might also ask you to work through an umbrella company, which handles your pay and taxes.

The recruitment agency will supply you with a Key Information Document that includes:

• the umbrella company managing all your temporary assignments through this agency
• the minimum rate paid to the umbrella company for your assignments
• any deductions the umbrella company will take
• the minimum gross pay you can expect

The recruitment agency will enter into a contract with the Umbrella Company, which will stipulate that the Umbrella Company is responsible for:

• Employing you and paying your salary according to the Key Information Document.
• Billing the agency for the hours you have worked.

For every new temporary position, the recruitment agency is required to provide confirmation of your new assignment details, including:

• The client you will be working for.
• Your job title.
• Your responsibilities.
• The notice period required to terminate the assignment.
• The location of your work.
• Any health and safety considerations, such as the need for personal protective equipment.

Despite technically contracting at that time - I didn't really consider myself to be a contractor. I saw this more as a temporary assignment until I found something permanent. As it transpired, the "something permanent" became a full-time employee position within the Royal Bank of Scotland HR web team 😄.

Personally, I didn't find working under an Umbrella Company to have any advantages for me. It limited the work I could do (more on that later), had fewer tax benefits and generally felt less than satisifed with the service I was paying for.

In my contracting career, I only worked under an Umbrella Company once but did use the accounting practice of one when I first started my Limited Company.

I'd recommend an Umbrella Company if you're only considering contract work for a short-period of time. Perhaps you're just tipping your toe in the water to see if contracting suits you...use an Umbrella Company. If you're looking longer term, keep reading.

Sole Trader

I started my contracting career in September 2011 as a Sole Trader.

Everything happened so quickly. I learned of the opportunity on the Thursday, had a call on the Friday with the project engagement lead and I flew to Baltimore on the Saturday.

I'd previously registered as self-employed in 2008 because I was working in the evenings outside of my full-time job. So I didn't need to do anything else. I was good to go. Setting up as a Sole Trader is the quickest and easiest way to get trading.

Under Armour didn't seem to care about it at the time and so I never gave it any thought. I did the work, I sent them an invoice for my time and expense and they paid me every week I was with them. It was one of the best contracts I've ever had.

Clients and agencies often avoid working with Sole Traders for several reasons. Clients worry that a Sole Trader could legally be considered an employee, which would give them certain employment rights. Agencies fear issues like debt transfer and regulations that require workers to be paid under PAYE (Pay As You Earn) schemes.

Additionally, being a Sole Trader has its own disadvantages for the contractor. Sole Traders have almost unlimited liability, which means their personal assets, like their homes, could be at risk if they face legal action from clients.

This is something I never gave any thought to when I started and, thankfully, I've never had to rue being a Sole Trader.

Limited Company

This is how I've operated since December 2011. GHIJK (it's pronounced 'geek') Ltd was the contracting business I've operated for the last 13 years.

For most of that time, Sarah and I have been the 2 directors and 50% shareholders in the business. You don't need to have 2 directors or indeed shareholders but this setup worked has worked well for us from a financial perspective. If you're in any doubt as to how to structure the Limited Company, speak to an accountant (more to come on that).

A Limited Company, I and many others believe, gives you much greater flexibility as a contractor but does come with greater responsibilty.

Here are some of the advantages to operating as a Limited Company:

• tax efficient compared to an Umbrella Company. Limited Company contractors typically take a smaller salary and the rest is drawn from dividends (company profits).
• you can work with multiple clients. This depends on the kind of work you're doing and be sure to check that you don't have any clauses in your client contracts that might prevent this.
• limited liability - if you screw up, you're not held personally liable, the business is and so your personal assets (like your home) are not at risk.

The Limited Company structure has worked well for me and I'd say if you're serious about a contracting career, then this is the route to go.