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Sole Trader vs Limited Company

"Should I be a sole trader or a limited company as a virtual assistant?" We get asked this a lot from start-up virtual assistants or those thinking of becoming a virtual assistant. Certainly the vast majority of VAs are sole traders (81% of UK VAs are sole traders*).

But then the majority of VAs are working part-time, and turning over under £30k* - so if your plan is to do something "a little bit different" with your VA business, you might want to think outside the box regarding business models too.

Setting up your business in the right way keeps costs down. It can also help prevent your working relationships turning sour (one of the major causes of business failure) if you are working with someone else. So first you need to decide which structure to use to set up your business:

  1. A sole trader,
  2. A limited company.

It is usually best to start as a sole trader (or a limited company if you and a friend going to work together). You can always ‘incorporate’ (set up as a limited company) at a later date.

Most VAs are:

  • Sole traders (81%)*
  • Working part-time (69%)*
  • Turnover of under £30k (Mode average £11k-£20k and mean average £27,190)*

Here’s some information on each structure:

Sole Trader as a virtual assistant

As a sole trader, you’re self-employed with no special legal structure. There is no distinction between you and the business. For simplicity alone, the sole trader is often the preferred choice for many start-up businesses; setting up is quick and easy and you can easily form a limited company later and transfer the business to it.

The major disadvantage is that you are personally liable for all your business debts. This means that your own assets — all of them — are at risk. Also you are entitled to fewer social security benefits, your options for raising money are limited and it is harder to sell the business or pass it on.

Each year you will be required to file a self-assessment tax return following the end of the tax year. Tax on your taxable profits is due every six months on 31 January and 31 July in the year following, so be sure to set aside sufficient provision against your profits to pay your tax. Non-payment by the due dates will result in automatic interest charges and, in some circumstances, penalties.

Limited Company as a virtual assistant

The second most common business structure is a limited company. The first and most important point, for the owner of a new small business, is to understand that a company is a completely separate legal entity from its owner. It’s the shareholders who own the company, and the directors who govern the company’s activities.

A limited company must prepare and file annual accounts at Companies House. Normally, the liability of the owners (shareholders who own the company’s shares) is limited to the amount they agree to invest in the company by buying its shares. However, there are still circumstances where personal liability may arise, for example, by giving personal guarantees or security on company borrowings, or the company trading wrongfully or fraudulently.

National Insurance - both employers and employees - has to be paid on salaries including those of company directors. For most small owner-managed limited companies it is sensible to pay the director’s salary at the level of the national insurance threshold (thus avoiding PAYE and NIC) and top this up with dividends which do not attract national insurance.

However you can only take a dividend out of profits, so if you make losses initially while you are building up your business you will have to take your remuneration as salary. Another point to note is that further tax is payable when these (net of tax) profits are extracted from the business. The amount of tax payable depends on how this is done as there are different tax rules and rates of tax applicable depending on whether the profits are extracted as dividends by the shareholders or as a salary/bonus taken by the employees/directors.

As a shareholder and director of a limited company, you can take a salary and/or dividends from the company's profits.  You can earn up to £2,000 in dividends before you pay any income tax on your dividends, this figure is over and above your personal allowance of £12,500 (more than £2k of dividends are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate and additional-rate at 38.1%).

This means that if you earn more than £20,000 per annum, after expenses, it is worth considering whether to incorporate and at higher levels of income you will almost certainly pay less tax and national insurance. Remember, however, that a limited company has to pay corporation tax so in determining the total tax ‘cost’ to the business owner this must be taken into account.

You can also issue childcare vouchers via the limited company to offset childcare fees - this has been somewhat eclipsed by the tax free childcare scheme though which all self-employed people are eligible for.

This calculator might help: https://www.crunch.co.uk/knowledge/tax/crunch-personal-tax-estimator/ although it doesn’t take into account the additional corporation tax paid by a limited company.

There's a few other things you want to consider when considering becoming a limited company:

  1. Additional costs of administering a limited co
  2. Marketing potential (both negative and positive)
  3. Potential protection
  4. Additional costs of administering a limited co

1. Additional Costs of administering a Limited Co

Limited companies must file an annual confirmation statement at Companies House - which costs £13 and accountants will usually charge extra to administer a limited company as opposed to a sole trader (usually about £300-£500 extra per year in accountancy fees) because of the requirement to produce statutory accounts and a corporation tax return.

You'll also need a business bank account and an address where you can display the company name - a legal requirement for all limited companies - and have any post forwarded. Your registered number and office address must also be displayed on your business stationery and website.

Let's say for the sake of argument, the extra costs are circa £500/year.

  1. Marketing potential (both negative and positive)

Positives: Big companies prefer working with limited companies - particularly the public sector may be reticent about working with a sole trader (who is personally liable for any issues) as they may not be able to recover damages etc.  However, you can combat this by having Professional Indemnity Insurance.

Negatives:  People seeing a limited company often assume it's a much bigger business than a solopreneur - you would need to manage client expectations around this.

  1. Potential protection

Limited Companies - as their name suggests - limit the liability of the shareholders if the business were to go bust or be sued.  In reality:

  • VAs rarely borrow money to finance the business, most preferring to bootstrap and those going down the financing route taking soft loans or angel investment. Generally VAs don't require massive capital investment to build a business, there aren't big assets involved as the main input is the VA's own time.
  • Professional VAs should be carrying insurance to cover any accidents, professional complaints, cyber issues or damages they cause as part of their work (see our article on different types of insurance) so as long as the VA's cover is adequate, there shouldn't be an issue.
  • Any bank offering loans to a limited company will seek personal liability and guarantees from the company's directors - so it probably doesn’t protect your home or any other assets.
  • Limited Company status and the listing of your details and the business's returns publicly may not be as comfortable as being a sole trader.

Conclusion: Sole trader or Limited Company for Virtual Assistants?

Generally speaking, the tax benefits of being a limited company outweigh the disadvantages once your profit hits £20k+.  With just 35%* of VAs having a turnover of £20k+ (let alone those making £20k profit) Limited Company status is advised only for a small section of the VA community.

Noel Guilford

Noel Guilford is a chartered accountant and co-founder of My Business HQ Limited a company which provides training for virtual assistants and bookkeepers via My VA Business and My Bookkeeping Business.

He can be contacted at noel@mybookkeepingbusiness.co.uk.

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