Sole Trader or Limited Company? Which is right for a VA? (2024)

This week we have a guest blog from Sally Farrant of Business Growth by Numbers, Sally recently delivered a live Q and A session for Trainees of the VA Mastery Course and Members of the VA Membership. Everyone loved Sally’s style and explanations surrounding the topic of whether Sole Trader or Limited Company? Which is right for a VA?

Disclaimer: this is general advice as I can’t give advice about your individual business. You should speak to an accountant about your personal circ*mstances.

This is a question I get asked almost more than any other from individuals starting out in business. Why would you want to be a limited company? Surely being a sole trader (self employed) is much more straightforward? And it is, but there are often good reasons to be a limited company. You should consider being a limited company if:-

• You are in business with someone else
• You employ anyone
• You have public liability insurance, professional indemnity insurance (or any other liability insurance).

For VAs starting out, the main issue is the liability insurance, as it’s probably just you on your own at the start. But do think about what you might want your business to look like in the future.

You may also want to consider being a company for tax purposes. At around £50,000 income per year, it can become more beneficial to be a limited company for tax reasons, despite the accountant costs.

As a VA, your most likely insurance is professional indemnity insurance and you need to ensure that you have enough cover. If you are self employed and one of your clients doesn’t like what you have recommended, they could take legal action. If this amount is over the amount you have insured, they can go after your personal assets (house, car etc). So, for example, you have insurance for £200,000 and the client sues you for £500,000. If they won, this would be paid out of your house equity and other assets. This is the main reason to be a limited company even when you are just starting out. If you don’t want to be a limited company, make sure you have high levels of professional indemnity insurance. Remember that you and your business are one and the same, so any financial difficulties with the business are your personal responsibility.

As a sole trader, it’s a bit like being employed, except you must pay the income tax and national insurance yourself via the self-assessment tax return. You register with HMRC as self employed and do a return once a year. You can do this yourself, but make sure you keep back money for it (around 30% of your income). Keep a separate bank account (it doesn’t have to be a business one) and put all your business expenses in it. FreeAgent is a great sole trader accounting system.

As a limited company, you have to register with Companies House and also with HMRC for corporation tax (currently 19% of your profit). You pay yourself in payroll and dividends and declare this on your personal tax return each year (keep back 15% for dividends plus income tax and national insurance). You will almost certainly need an accountant for this as you have to produce company accounts each year, which will probably cost you around £100 per month depending on what they do for you (bookkeeping, year-end accounts, payroll and tax). You will need a business bank account and an accounting system (look at Xero).

There are slightly different rules about what you can claim in expenses in each case, but mostly you can claim anything “wholly and exclusively” used for the running of your business. This means if you buy anything for your business, or travel, you can claim this as a business cost.

So how do you decide? Take into account all your income streams, not just your business, plus your overall financial position, so don’t forget to take into account your other jobs, rental income, pensions etc. plus other household income eg spouse/partner. If you are an owner/director, you can also pay company pension contributions.

Get advice from an accountant – they will often give you some time for free or a relatively small fee which will set you up properly from the start.

What is your business vision? If you have big plans, it might be better to be limited from the start, then you don’t have to change over later. VAT registration is often easier to manage in a limited company and you must be registered if your income is over £85,000.

Sally is a management accountant with over 20 years experience in industry. She has worked for a huge variety of companies, from Channel 4 to Guinness World Records, from Philips to Mitie. Every company is different but finances don’t differ that much. She now works with much smaller businesses, often being the first finance person to work in the business.

Sally set up Business Growth by Numbers in order to give businesses clarity around their numbers, and to enable flexibility around a young family. Married, a mum of 2 boys aged 7 & 5, life can be a bit crazy at times! Sally oves watching football, rugby and cricket and is a keen sailor. She describes herself as lovinga spreadsheet and a messy balance sheet!

Sally now specialises in sorting out company accounts to ensure the accounts clearly reflect how the business is doing, and then producing clear management information for business owners to understand. She also helps people to understand how their accounts actually work, and to be able to run them without me. Sally has some great freebies and also runs online courses to help micro businesses get set up correctly from the start. Amanda totally recommends you sign up for herfree mini series “Managing money in your small business”

This is how you can connect with Sally on Social Media:

LinkedIn: https://www.linkedin.com/in/sally-farrant/

Facebook: https://www.facebook.com/businessgrowthbynumbers

Twitter: https://twitter.com/BGrowthNumbers