The Practical Guide to Limited Company Tax
If you have chosen to operate your business as a limited com...
By Jonathan London on 16th September 2015
One of the most prominent benefits of going freelance is the ability to dictate your own working hours and approach to building relationships with clients.
For those used to the prescribed hours and enshrined quotas and deadlines associated with nine-to-five office work, this can be an extremely refreshing change of pace, allowing you to dictate the terms of your project work and organise your schedule in a way that plays to your strengths and accommodates your personal needs.
Inevitably, though, with that choice comes a certain amount of responsibility, as it will now fall on you to devise a pattern of work that will suit your business and deliver the kind of returns it needs to thrive. One of the most important considerations is your approach to long-term versus short-term contracts, and the different ways in which these two business models can affect your operating model and client relationships.
Each approach has its own benefits and drawbacks, and you’ll need to think carefully about all of them if you want to make sure you find the option that is most suitable for your own needs.
When you first start out as a self-employed worker, it’s likely that a majority of your work will be short-term projects that involve you doing a single assignment for a client, with the relationship ostensibly coming to an end upon its completion.
It’s logical that this type of work will probably be your bread and butter initially – after all, most freelancers do not have a strongly established reputation when they first start out, so it’s unlikely that a client will want to go all in with a long-term contract straight away. If you’ve come from the world of salaried employment, this piecemeal approach to business planning can take some time to get used to, and you’ll learn much about its pros and cons in those first few months.
Naturally, a lack of stability and security is the main drawback of the job-by-job approach, as it’s difficult to make firm predictions about your future income and time commitments when contracts are coming and going on an ad hoc basis. For this to work for your business, you need to be nimble and flexible, prepared to change tack at a moment’s notice and deal with setbacks and cancellations when they occur; this can be draining, and contribute to the feeling you’re always on the clock.
However, the flexibility involved in this type of work can also be extremely beneficial when done right, as it will allow you to move projects around, ramp up your production and output at busy periods and wind down as and when you need to. This will make your business highly responsive and agile – a trait that will mark you out from larger competitors – while giving you tight control over your own schedule and work-life balance.
Opportunities to secure longer-term contracts will become available to you as your business gains momentum, and on the face of it they may seem like a clear step up. However, like any project, they need to be handled properly to get the most out of them.
Naturally, a long-term project provides a degree of job security that freelancers often miss, and removes financial guesswork to a large extent as you’re guaranteed a certain income over an extended period of time. Moreover, long-term contracts give you a great opportunity to really develop a trusted, mutually beneficial relationship with a client, allowing you to really get to know the business you’re working with; this will give you not only a better chance of earning more projects with the client, but also an opportunity to augment your base of knowledge.
However, if that contract is planned poorly or goes sour, then a long-term project can be a millstone around your neck. A failure to click with the client can develop into an adversarial relationship from which it may be difficult to escape, and it’s also vital to make sure you set out a fair system of charges at the outset, lest you end up underselling your services.
Additionally, it should also be borne in mind that a long-term contract will usually involve a major time commitment, making your company less flexible and able to take on additional business or change direction if needed, so you’ll need to be prepared to account for this before you commit.
Ultimately, the choice between long-term contracts and job-by-job work is likely to come down to a combination of personal preference, circumstance and the specific needs of your business.
Neither approach can be said to be outright superior, so it’s best to weigh up the pros and cons on a case-by-case basis and decide which option is going to work best for you and your clients, whether that means sticking with piecemeal planning, committing fully to a long-term project, or utilising a combination of both.
Our handy guide to claiming expenses through your limited company looks at what you can and can’t claim tax relief on through your company
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