What is the difference between a Sole Trader and a Limited Company?
If you are a Sole Trader it means you are personally liable to the debts of your business. Therefore your personal assets, such as your house and car, can potentially be used to pay your creditors. If you set up a Limited Company, then your business becomes a separate legal entity. This means that your potential creditors can only claim against the assets of your company.
There is certainly less legal ‘red tape’ when operating as Sole Trader. Initially setting up as a Limited Company is more expensive and can be slightly more time-consuming. Although using a company formation agent such as Accountant Online speeds up this process.
Limited Companies are also obligated to file their annual returns and accounts with the CRO, which Sole Traders are not required to do. You also must be a resident of Ireland to operate as a Sole Trader.
There are also several other advantages and disadvantages for Sole Traders and Limited Companies that we will go through in this guide.
Pros and cons of Sole Trader & Limited Company
- All your profits are taxed at the income tax rate, which can be up to 40%
- Personally liable for debts
- Lower tax credit than employees
- You still need to prepare a tax return
- Simple to set up & shut down
- Less legal filings compared to a Limited Company
- You don’t have to prepare financial statements
- Low Corporation Tax rate
- More tax reliefs and benefits
- Credibility in the industry
- Protection of private assets
- More corporate filings and deadlines
- Large fines and penalties for non-compliance
- Longer and more expensive to set up than a Sole Trader
Are your tax returns due this year?
If you are a Sole Trader and you have been trading since 2018, you will have to file a self-assessed Income Tax return and pay your tax liabilities before the 31st October 2020.
The difference in accountancy fees
If you’re a startup Sole Trader or Limited Company, it’s a good idea to have fixed costs per month so you can keep track of your expenditure. Accountant Online operates on a fixed fee basis so that you know how much to budget. We deduct a monthly fee so you can avoid a price shock at the end of the tax year.
Fees for Sole Traders
Sole Trader accountancy fees are based on turnover, level of cash transactions and whether or not you’d like us to take care of your VAT returns. If you’re ready to get set up as Self-Employed on Revenue, we can help you with your legal obligations from the start. Our fees for Sole Traders are based on what you need, so if you get in touch and we can send you a quotation.
Fees for Limited Companies
We offer Limited Companies our Startup Offer for accounting services for just €294 + VAT for the first six months after incorporation. After that time, our fees will vary depending on the complexity of your business and the expected turnover.
You will be offered a quotation based on what services you would like us to provide you with. Our full-service accountancy package includes all compliance requirements, VAT returns, payroll, and directors returns.
Tax advantages for Limited Companies
A common question from our clients is will I pay less tax if I’m a Limited Company?
A Sole Trader in Ireland is subject to personal tax rates of 20-40% income tax on all profits. In addition, you could be paying Universal Social Charge (USC) of up to 11% and Pay Related Social Insurance (PRSI) of 4% for the highest tax bracket.
On the other hand, Limited Companies benefit from only having to pay corporation tax at 12.5% for company profits in Ireland. Furthermore, newly Limited Companies may qualify for relief from corporation tax for the first 3 years of trading. Check out the Revenue website for more information on this tax relief scheme.
Is it better to be a Sole Trader or a Limited Company?
What is your attitude towards risk?
Are you willing to risk losing your personal assets if your business hits troubled waters, or would you prefer to protect these assets against any potential creditors?
What are your business activities?
If you are working in an industry that has a higher risk of you getting sued for damages due to error, setting up a Limited Company might be the safest bet for you.
Are you in professional services?
For businesses selling professional services, having a Limited Company can give your business a more established image. It is also not uncommon for larger corporations to deal exclusively with Limited Companies.
Are you based in Ireland?
If you are not based in Ireland, then you will not be able to register as a Sole Trader.
How long have you been operating your business, and how successful is it?
If you are a well established Sole Trader with rising profits, setting up a Limited company may be the best option for you. As previously mentioned, you will then be able to avail of the 12.5% Irish corporation tax rate.
Are you aware of all the compliance obligations?
Keeping your company compliant with all the relevant rules and regulations is a lot of work. Make sure you have a company secretary who is aware of these various laws or let us be your company secretary and look after the compliance for your company.
Is there a difference in salary?
When you’re starting a new business, you’re probably not worried about how you’re going to pay yourself – many Startups may choose to put any money they make back into the business.
However, this can be a deciding factor when choosing to become a Sole Trader or Limited Company.
For example, if you incorporate your company and you wish to take a salary, the Limited Company will pay you the salary through payroll. If you are a Sole Trader, any money you take from the business is described as ‘drawings’. These ‘drawings’ include what you pay yourself every week/month, plus personal expenses you take from the business.
How can I change from a Sole Trader to a Limited Company?
Switching from a Sole Trader to a Limited Company is a reasonably straightforward process. Most people enlist the services of a company registration agent, such as Accountant Online, to ensure that the process is done efficiently and correctly.
Sole Traders should first deregister their business name with the Companies Registration Office (CRO), and then choose the new name for their Limited Company. As part of our company formation package we provide a free name check with the CRO, however, the CRO is very strict with Limited Company names and you may not get your first choice.
Before starting your Limited Company you must make certain that you are complying with all the relevant legal requirements. For example, you must have at least one director and one company secretary, with one director companies requiring a different person as company secretary. Check out are a checklist for setting up a Limited Company for a full list of the requirements for setting up a Limited Company.