When to change from Sole Trader to Limited Company
Are you thinking about transferring your business into a company? For many business owners, this is the only way they can grow, expand into new markets, and it can be tax-efficient to change into a company.
There are many benefits to changing from a Sole Trader to a Limited Company, but first and foremost, the decision should be based on sound commercial reasons, not short-term tax saving. You should also be aware of the costs involved with setting up a Limited Company when making your decision.
This is what you should ask yourself to decide if it’s time to change.
Should I change?
How much is your business going to grow?
Since you’re already in business, you probably have expectations of how your business will grow over the next 12 months.
If your business is expanding and growing rapidly, it makes sense to have the profits taxed at the rate of Corporation Tax (12.5%). If the business is stagnant (turnover of €50,000 with little growth), it may make sense to leave it as a Sole Trader business – there are fewer Revenue compliance requirements as a Sole Trader.
Do you require the protection of limited liability?
When you set up a company, you are setting up a separate legal entity to its Directors and Shareholders. This means that you won’t be personally liable for any of the debts of the business. This is called limited liability and one of the benefits of setting up a Limited Company in Ireland.
Maybe your business isn’t growing yet but you need extra funding for your business or you’re hoping to expand into new markets. Having limited liability can help elevate some of the risks.
Are you making more money in your business than you need as a salary?
This seems like a strange thing to think about – how can you make too much money? But there are tax implications depending on how much you earn.
As a company, there are more ways to extract money than as a Sole Trader, such as salary, dividends, and contributing to a pension. Check out our guide on how much you should pay yourself as a director.
1. Choose your new company name
Do you have an existing business name or are you trading under your own name? If you already have a business name, you’ll need to de-register it as part of the switching process. It’s important to note that your business name can’t be transferred to your new company.
When you’re choosing the right name for your new company, it needs to be unique and distinguishable against other names already registered with the Companies Registration Office (CRO). It also needs to have the word ‘Limited’ at the end. Check out our guide on choosing a business name for more information.
To find out more about business names vs company names, please contact our Client Services Team. Let us know your preferred company name and we will check if it is available with the CRO.
What if you can’t get the company name you want?
If you want to use your existing business name as your company name, you need to make sure that it doesn’t remotely match a name that already exists on the CRO register. The CRO is very strict with company names. For example, a company needs to be shut down (i.e dissolved) for 20 years before you can use their name.
If you can’t get the company name you want, you can set up your company with a unique and distinguishable name. Then, once the company is set up, your new company can register the business name.
Registering a business name means your company will have a ‘Trading As’ name. For example, Alpha Alphabet Limited trading as (t/a) Alphabet Consulting.
2. Incorporate the business
The next step is to prepare and send your application to incorporate a company into the CRO. You can do this through CORE.ie or through a company formation agent like us (check out our Company Formations Service page).
As a Sole Trader, you may never encounter the CRO (unless you registered a business name) and you might find it confusing to deal with them.
You may already be aware that the companies have more compliance requirements than Sole Traders. So, when you’re changing from Sole Trader to Limited Company in Ireland, it’s important to be aware that although the application is submitted online, the paperwork still needs physical signatures.
What you need to set up a company
- One Director
- One Shareholder
- One Company Secretary
- Registered address
- Business address
- Form A1 – This is the form that you submit to the CRO so they can process your new company.
- Constitution – Each company needs a constitution that sets out the rules and guidelines of the company.
Outsource Company Formation
We offer a range of Company Formation packages to ensure your company is set up correctly. We take care of all the paperwork, offer advice, and submit your application to the CRO.Find Out More
3. Cease operating as a Sole Trader
Once your company has been set up and you have your company number, it’s time to cease operating as a Sole Trader.
The CRO takes 3-5 working days to process your new company application so the date of incorporation will be a few days after you send in your forms.
In general, the date your company is incorporated is the cessation date for your sole trade.
Once you’ve set up your company, the process of changing from Sole Trader to Limited Company in Ireland can get tricky and you may need an accountant to help.
If you would like to outsource your accountant to a professional, get started by talking to our Client Services Team about what services you need.
How to transfer from Sole Trader to Limited Company?
Every situation will be different so important that you speak to an accountant if you need help changing from Sole Trader to Limited Company in Ireland.
Talk to our Client Services team if you need accountancy services in Ireland. We’re happy to send you a quotation to file your Income Tax return and help you get set up as a Limited Company in Ireland.
What do you need to do?
Determine the value of your business
Sole Trader accounts need to be prepared to determine the value of your business that will be transferred to the new company upon incorporation (if any).
If you transfer any assets, it may have Capital Gains Tax (CGT) implications. There's more on this later.
Prepare Income Tax return
The cessation date of your Sole Trader business will be notified to Revenue when you file your next income tax return.
It’s ok if your company is set up before filing your return as long as the valuations are calculated correctly. Contact us if you need help filing your Income Tax return.
4. Sort out your bank accounts and online accounting software
Your new company needs to have a separate business bank account in its own name. If you have a business account for your Sole Trader business, you’ll need to close this account and transfer the assets to your company account.
Sole Traders and Limited Companies are separate entities and have their own reporting requirements. So, it’s important to keep your online accounting software segregated and ensure any transactions are reflected accurately in both entities.
If you didn’t use online accounting software as a Sole Trader, now is the perfect time to take your accounts online. Taking your accounts online will make your accounting obligations easier to manage and your accountant will appreciate your invoices, bank statements, and receipts being on the cloud. Check out our guide to find out more about Moving Your Accounts Online With Xero.
How to record transactions when changing from Sole Trader to Limited Company?
This depends on when the Sole Trader ceases business.
1. Sole Trader ceases before the company starts
Once you have stopped the Sole Trader business, you can start to record all your transactions in the company account. There are no Sole Trader transactions to enter.
2. Sole Trader and Limited Company crossover
This is a bit more complicated and please note that this is general advice. If you want specific guidance for your business, talk to your accountant about what you need to do. If you don’t have an accountant, contact our Client Services Team for a quotation.
Example of Sole Trader and Limited Company crossover
Crossover in purchases
This could happen if you don’t have a separate bank account for your company yet.
If a purchase is made from the Sole Trader account but is meant for the Limited Company, it’s entered as normal in the Sole Trader account.
However, this purchase is also entered into the company account as being owed to the Sole Trader. In the company account, the purchase is entered as a purchase from a supplier. In other words, your Sole Trader business is selling the supply to your new company.
Please note that VAT cannot be claimed in the Sole Trader business for this purchase because the purchase was not for that business.
Crossover in sales
This could happen if you don’t update your clients on your new bank account details.
If your client paid money into your Sole Trader bank account instead of your Limited Company bank account, the money will need to be transferred to your company bank account.
The debtor will remain in the company until the money is in the company bank account. The sales receipt in the Sole Trader account should show as being owed to your new company.
Again, care should be taken here to ensure VAT is being claimed by the correct entity, where applicable. Talk to our Client Services Team about what services you need to change your Sole Trader into a Limited Company.
5. Tax implications of transferring a business to Limited Company
As mentioned above, determining the value of your assets is required when changing from Sole Trader to Limited Company in Ireland.
When you’re calculating the value, the most common potential tax implication is Capital Gains Tax (CGT) at 33%.
As a Sole Trader, you own all the assets of the business. Therefore, you are deemed to have sold them when transferring those assets to your new company.
When transferring assets, the market value of the assets transferred, less their original cost, will be subject to CGT at 33%.
Do you have to transfer your assets?
When incorporating your business into a company, there is no requirement to transfer capital assets. However, you can decide to transfer all the assets and liabilities of your business or perhaps just some. Remember, you will only be deemed to have sold assets to the company if you choose to transfer them.
Each circumstance will have different tax implications and therefore it is difficult to give standard advice on this step.
Seek professional advice from an accountant about your scenario. We’re always happy to help. If you would like to talk to us about our accounting services, get in touch with our Client Services Team now.
What about CGT relief?
The good news is there are reliefs available against CGT in some circumstances. These reliefs won't apply to all cases and should be discussed with an accountant. Please seek professional advice regarding your business as each case may be different.
If you are aged 55 or over, you can claim retirement relief even though you are continuing to run the business through the company.
In this scenario, you need to fulfill the 10-year ownership requirement and the transfer should be for sound commercial reasons. For example, the desire for limited liability. This relief allows you to transfer assets to a value of €750,000 to the company without giving rise to any CGT liability.
To claim retirement relief, you do not need to transfer the entire business to the company.
Deferral of CGT liability
If you are too young to claim retirement relief, or you do not meet the 10-year test, you can claim a deferral of any CGT liability arising on the transfer of your business to the company.
In this case, the value of the company shares will be depressed for CGT purposes. This means that when you come to sell the shares in your new company, a in-built gain will crystallise.
To claim the CGT deferral, you must transfer the entire business to the company.
If you’re ready to start changing from Sole Trader to Limited Company in Ireland, talk to our Client Services Team about how we can help you transfer your business.
We offer a wide range of Company Secretarial and Accountancy Services so we can take care of the transfer and make sure it’s a smooth and easy process.
Call us on +353 (0)1 905 9364 or email email@example.com.
Rose is the Director of Sales and Marketing at Accountant Online. Rose has worked in senior leadership roles for over 20 years in both US corporates and Irish SME’s. Areas of expertise: Leadership, Strategic Planning, Executive Coaching, Mentorship, Online Business Management