Limited Liability or Sole Trade, that is the question – Jamaica Business 101

Limited Vs Soletrader

Now that you are inspired to start a generation legacy by starting a business, the first thing you need to ensure, that it is a registered entity. There are basically two choices – limited liability and sole trader.

 

Sole Trader or Partnership Limited Company: you are director & shareholder
Cost

  • It cost $2500.00JMD
Cost

  • It cost $24500 JMD
You are the owner You are a shareholder; you hold all or a proportion of the company’s share capital
You are the manager or proprietor You serve the company as its officer as a director (a company secretary is an officer too)
In the event of any legal dispute, you will be sued personally unless you have suitable insurance e.g. products and services liability, professional indemnity, employer’s liability etc. In the event of any legal dispute, the company will be sued unless it has suitable insurance cover.
Employment status:

  • You are self-employed; you cannot be your own employee.

 

Employment status:

  • A director is an office holder, this does not automatically make you an employee in terms of employment law, the National Minimum Wage or for Tax Credits.
Tax on profits:

  • You pay the statutoty taxes (NIS, NHT Ed TAX & Income Tax) on the taxable profits of your business, or your share of profits, if you are in partnership.
Tax on profits:

Losses:

  • You can offset your trading losses against your other income.
Losses:

  • The company can offset its trading losses against its other income, but not against your income as an individual
Extracting profits

  • You may withdraw cash from the business without tax effect.
Extracting profits

You are taxed on:

  • Any income withdrawn from the company. If it is a distribution it is taxed as a dividend. If it is earnings it is under PAYE.
  • Most employment benefits received by you or your family and household are taxable (subject to tax-free exceptions).
  • Shares or securities in the company which are given to you at less then market value.
Borrowing

  • You are free to borrow from the business bank account, it is your account.
  • If your business bank runs at an overdraft due to the amount of funds that you have withdrawn personally, tax relief on bank charges and interest will be proportionately restricted.
Borrowing

Borrowing by directors is permitted. Limits are set by Companies Act,  but there are tax cost associated.

Pension

  • You can only have a Personal Pension.
Pension

  • Company schemes may be far more generous in terms of benefits and limits than Personal Pension.
Debts

  • If the business fails you will be personally (or jointly with your partners) liable for its debts. You may go bankrupt.
Debts

  • If the company fails, your liability is limited to the amount unpaid on your shares (if any) unless you have made a personal guarantee for the company’s borrowing (which is often required by banks).
  • As a director you can be held personally accountable if you continue trading when your company is insolvent and this causes financial loss to creditors. This could result in your personal bankruptcy.
Financial Accounts

  • There is no requirement that you prepare accounts for tax purposes. However you may find that it is difficult to keep on top of your business, collect debts and work out profits without keeping accounts.
  • You have the option of cash accounting or conventional accounting.
  • You may need annual accounts to complete your personal tax return which includes a balance sheet section.
  • Your taxable profit under Self Assessment must be prepared in accordance with Generally Accepted Accounting Practices (GAAP) for tax purposes unless you are cash accounting.
Accounts

  • You must prepare annual accounts under the provisions of the Companies Act.
  • Accounts must be prepared in accordance with accounting standards.
Selling the business

When the business or assets used in it are sold, you are personally taxed on any gain under the Capital Gains Tax (CGT) rules.

Selling the business

When the business or the assets used in it are sold, there is a double tax charge on shareholders. The company pays corporation tax on any profit that it makes on disposal. The shareholders are taxed on the distribution of the proceeds.

  • It may often be more efficient to sell the shares in a company, rather than its trade or business, or individual assets.
Death

  • When you die your business ceases.
  • In a partnership you can pass on your share of the partnership.
Death

  • When you die the company lives on: it is a separate legal entity.
Paying yourself

  • You can withdraw any amount of profits, but it is not classed as remuneration as you are not an employee.
  • Paying a salary to a spouse or family members must be commercially justified to be allowable for tax purposes.
Paying yourself

  • There is no restriction on the size of your salary, but it is subject to statutory taxes.
  • Paying a salary to a spouse or family members must be commercially justified to be allowable for tax purposes.
Expenses in general:

  • You obtain tax relief for expenses that are incurred wholly and exclusively for the purposes of the trade.
  • If you can identify a proportion of an expense that relates to business you can claim the same proportion against tax.
  • An adjustment must be made for tax to add back the proportion of any expense that relates to “private use”.
  • Most commonly private use will be in respect of your use of telephone or power, own consumption of goods, and motor running expenses.
Expenses in general:

  • The company obtains tax relief for its expenses if they are incurred wholly and exclusively for the purposes of the trade.
  • If a director incurs private expenses through the company, they may be treated as earnings, if he is a shareholder the amounts are treated as distributions.

 

Cars and fuel

  • A sole trader or partner can claim capital allowances on a car, disallowing a proportion for private use.
  • There is no adjustment for fuel benefit for you as a sole trader, you merely disallow a proportion of your fuel costs in relation to private use. See Motor expenses (self-employed).
Cars and fuel

  • The company obtains full capital allowances on cars, irrespective of any private use by employees.
  • It is not tax efficient to provide company car drivers with fuel for private use, employers are permitted to reimburse company car drivers for business mileage but they must use special employer’s advisory rates.
Mobile phones

  • Mobile phones will be subject to private use so a tax add-back is expected on your tax return.
Mobile phones

  • Mobile phones can be provided if the contract is in the company’s name, tax free.
Computers

  • You can obtain capital allowances on a computer. An add back of allowances will apply if there is substantial private use.
Computers

  • Providing you need to use one to perform your role your company can provide a computer without any tax consequences.
Tax-free benefits and incentives

  • These do not apply to the self-employed

 

Tax-free benefits and incentives

  • Many different benefits and employment incentives can be provided free of tax (the company will obtain tax relief on the cost of providing these too).
Working from home

  • You will be able to claim a deduction for mortgage interest, rates and light and heat, if you have an office at home.
Working from home

  • Alternatively, the company can reimburse you for light and heat, but not mortgage interest or council tax.
Charging rent for use of home

  • A sole trader cannot charge himself rent.

 

Charging rent for use of home

  • A director you may set up a licence between you and your company to rent an office (or other space) in your home or outbuildings. This will enable you to recharge a proportion of mortgage interest.
  • You will need to declare this as income and prepare rental accounts as for Self Assessment tax purposes.

Sole Trader Registration form

https://www.orcjamaica.com/(S(3ynskl55qmci0r55tdmzc1u5))/CompForms/bn1%20rev%201.2011.pdf

 

Limited Liability Registration form

https://www.orcjamaica.com/CompForms/COMPANIES%20FORM%201A%20(CPC%20Version%203).pdf

 

Need help deciding if you should register your business as a sole trader or limited liability shoot me an email shawnakay.mills@financialassistant.com

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