Should you set up as a Sole Trader or a Limited Company?
What expenses can be claimed against Income?
There are numerous ways of starting your business, the major ones being a sole trader or limited company. Each has some benefits to offer the owners, while each has some shortcomings of which the owner(s) should be aware.
A Sole Trader is a business that is owned and controlled by one person. This structure is very attractive for those entrepreneurs who wish to retain total control and ownership of the enterprise. Many sole traders who decide to operate under their own name can do so without any particular problem. However, if you use a name other than your surname, you must register the name.
Advantages of the Sole Trader
No legal formalities compared to other structures
The sole trader is not required to register accounts apart from the usual income tax requirements, therefore confidentiality is maintained
The income from the business is personal income and most business expenses can be offset against it for tax purposes
Total responsibility for the business is in the hands of the owner
The relative ease of winding up the business.
Disadvantages of the Sole Trader
The owner is personally liable for all debts of the business
Since there is only one owner of the business, there is a limit to the amount of capital that can be raised for operations. Many may stay small because of financial restrictions
Should you set up as a Limited Company?
A limited company is a separate legal entity. As a separate entity it has sole responsibility for its debts, which frees its owners from this responsibility. Its liabilities are limited to the paid-up share capital - hence the company is said to have "limited liability".
Advantages of a Limited Company
Limited liability - shareholders are only liable to lose the share capital they subscribe
Greater company pension scheme can be secured
Greater ability to raise finance by the issue of shares and also under the Business Expansion Scheme
Ownership of the enterprise can be spread over a greater number of people
Personal tax advantages can accrue
Disadvantages of a Limited Company
Limited liability may be negated in practice by lenders seeking personal guarantees
Adhering to legislation contained in the Companies Act can be costly and time consuming
The need to prepare and file audited accounts
accumulated profits are withdrawn from the company
What expenses can be claimed against Income?
The general rule is that the expense should be ‘wholly, exclusively and necessarily’ incurred in the course of the trade or profession.
For a typical self-employed person working from home, the expenses allowable would include stationery, postage, maintenance and repairs of equipment, telephone (where a telephone is used for both business and personal purposes, the cost is apportioned between the two), motor costs (also apportioned between business and personal use), accountancy, bank interest and charges, professional subscriptions, relevant educational courses, etc.
A self-employed person working from home can claim use of home as office which involves offsetting against income a proportion of home light, heat and insurance, on the basis of the proportion of the house or flat used for business purposes.
Entertaining business clients is not a deductible expense, but when a person is working away from base for a number of hours, the cost of a meal is deductible as subsistence or the cost of an overnight stay necessary for business purposes may be claimed. Certain records must be kept.
The cost of equipment or of a car is written off over a period of years, rather than allowed in the year of purchase.
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