Should Freelance Animators Operate as Sole Traders or Set Up a Limited Company?

A freelancer

Part of our job at Animation Apprentice is to teach our students to be working professionals, which includes not only the ability to do excellent work at a high level of professional skill,  but also the ability to run a small business and tackle freelance work.

Almost all digital artists take on freelance work of one kind or another, and we help our students out by bringing in small commercial projects at our virtual online studio at nano-films.com, giving our students paid experience on live briefs.

Being a freelancer involves learning a lot of new business skills, and one of the most common questions asked by students is: "Do I Need to Set Up a Company before I become a freelancer?" The short answer is "no", but it's not quite as simple as that - it all depends on your personal circumstances.

Render Under Caesar What Is Due To Caesar

Sole Trader
Both in the UK and the USA it is very simple to be an independent freelancer. You just start working for clients, send out an invoice, and get paid. At the end of the tax year, you report to the IRS or the Inland Revenue all your income, less your expenses (computers, software, travel expesnes etc) and you pay tax on the difference - which is your profit.

It's called being a sole trader, and it is very simple to do. It is the same basic structure for anyone selling a product, whether it is a shop on ebay or a stall at the farmer's market. You don't even need to register with the Revenue - you just start trading.

Limited Company

Setting up a company is different. You have to pay fees to set the company up in the first place, to register it, and also to file annual reports, as well as paying annual corporation tax. It's much more of a hassle than being a sole trader, and there aren't really any tax advantages.

So why set up a company? There are three main reasons:

1. Because your customers and clients make you. Once you reach a certain size, plenty of companies won't like doing business with a sole trader. They are used to dealing with companies, and they will insist on it. 
2. Liability. As a sole trader, you are personally liable for everything the company does, down to your last penny.  Most companies are Limited Liability Companies (hence Ltd) which means that if the company goes bust or gets sued - you won't lose your house.
3. It's the grown-up thing to do. Once you start to grow and employ people, it makes sense to have a formal vehicle for your operations. Sole trader status is convenient, but it only makes sense for small operations of low complexity.

In effect, company status is something that, sooner or later, will likely be forced upon you as you grow. It is one of the perils of success. While you are still small then, you are probably better off being a sole trader, but with size and complexity comes the need for a more formal status.

To see more about the benefits and burdens of setting up a company versus being a sole trader, see this link:  http://www.theguardian.com/small-business-network/2013/sep/12/sole-trader-limited-company-freelances

To sign up for our November classroom at Animation Apprentice, follow this link. For more information on finding work and surviving in the animation and visual effects business, read our post on how to find a job in the animation industry, and check out our post about what not to do at a job interview. Also see our post on starting your own small animation business, learn how to create an invoice, and see how we are helping our students find work through our film co-operative Nano Films.  Download the free Escape Studios Careers in VFX Handbook. Take a look at how awn.com can help you find a job, and read our piece about how to survive as a freelance animator. Also, find out what Cinesite look for in a student's demo reel, and read our post on setting up your own animation business. Also see our post about freelancers and taxes.