Sole Traders and Limited Companies are two of Ireland’s most common business structures. Choose your business structure carefully – it is an important decision. As an experienced company formation agent to hundreds of Irish businesses, we understand the importance of this choice and can guide you to help you make an informed decision.
This guide will outline the key factors to consider when deciding between a Sole Trader and a Limited Company. While the ultimate choice depends on your intentions with the business, understanding the disparities in tax obligations and personal liability can significantly influence your decision-making process. We aim to provide you with the information you need to select the best structure for your business.
Advantages and disadvantages of Sole Trader vs Limited Company
Advantages of Sole Trader
- Simple to set up & shut down
- Less legal filings compared to a Limited Company
- You don’t have to prepare financial statements
- More privacy than a company - your financial details are not visible to the public
Disadvantages of Sole Trader
- There is no legal difference between you and your business
- Unlimited liability - your assets can be used to settle debts
- You may still need to register a business name with the Companies Registration Office
- All your earnings (minus expenses) are taxed as your income, which can mean a tax rate of up to 55%
- Limited scope for tax planning
- You still need to prepare a tax return each year
- You may lose out on some contracts that only work with Limited Companies
- Decreased likelihood of receiving credit or access to grants
Advantages of a Limited Company
- Profits (after expenses) are taxed at 12.5% (Corporation Tax)
- Setting up a separate legal entity - you can appoint yourself as a director and shareholder
- Limited liability - your assets generally can't be used to settle the debts of the company
- More tax reliefs and benefits for directors - e.g. access to €500 tax-free vouchers
- Great scope for financial and salary planning - e.g. pensions
- More creditability in the industry
- Increased eligibility for government schemes and grants
- More likely to be approved for credit
- More options for exit planning and succession
- Partial protection over the company name
Disadvantages of Limited Company
- The public has access to the company's financial accounts
- Large fines and penalties for non-compliance
- Longer and more expensive to set up and close down
- Directors have fiduciary duties - legal obligations to act in the best interest of the company
- You may lose ownership of your company if you sell shares
What is the difference between Sole Trader and a Limited Company?
Differences in income
Firstly, consider how much you expect to earn through the business. The level of income will determine the tax rate you will pay.
Sole traders are liable to income taxes up to 55% on all income (minus expenses). Anything you use for personal reasons is called “drawings”, which are not the same as employees’ wages and cannot be deducted as a tax-deductible business expense.
As a director of a Limited Company, you can pay yourself a salary or take dividends and contribute to a pension. Your salary will be taxed as an employee (income tax, USC, and PRSI), and your company will collect the taxes and pay it to Revenue. It’s good to note that your salary is a tax-deductible business expense, which will lower your tax bill at the end of the year.
You also have the option to take dividends and contribute to a pension. We recommend that you talk to your accountant to learn more about these options, which can differ depending on your situation.
Differences in tax
As mentioned above, as a Sole Trader, everything that you earn (minus expenses) is liable to income tax. Depending on how much you make, you could end up with a large tax bill to pay at the end of the year, and you may consider changing from Sole Trader to Limited Company at this stage.
As a Limited Company, everything the company earns is added to its turnover, and turnover (minus expenses, e.g. directors salary, see above), i.e. profit, is liable to Corporation Tax up to 25%. If the directors are residents of Ireland, they are likely to pay Corporation Tax at 12.5%, which is a considerable benefit of company formation in Ireland.
Depending on your business, you may also need to pay other taxes, such as Relevant Contracts Tax (RCT), VAT, and Employer’s PRSI. We recommend that you talk to your accountant for more information on your tax liability and to help you calculate what taxes you need to pay.
Differences in professional fees
Whether you choose to be a Sole Trader or a Limited Company, you may start the same way – minimal invoices, a handful of expenses, and many gruelling hours trying to get your business off the ground.
Many of our clients decide to take on the bookkeeping themselves for the first year and outsource the tax returns and compliance to us, giving you peace of mind that your deadlines are covered and you can focus on the day-to-day running of your business.
The difference in growth prospects
Registering as a Sole Trader is often a suitable and ideal option. It is easy to set up and close down, you can set it up as a side hustle alongside your 9-5 job, and you can have peace of mind that your Revenue responsibilities generally don’t change. If you are asking if you can be employed and self-employed at the same time in Ireland, the short answer is yes.
However, if you have growth plans, are building a brand, or plan on creating a business that will still be around for future generations, then registering as a Limited Company is the clear option for you.
If you have concerns about whether your idea/business plan will work, you can change from Sole Trader to a Limited Company at a later stage. Although be aware that if you have built a brand as a Sole Trader, you may not be able to keep the same company name, you may be subject to Capital Gains Tax (CGT), and there may be additional bookkeeping requirements.
How to decide between a Limited Company and Sole Trader
What level of personal liability am I comfortable with?
An important factor to keep in mind is that Sole Traders are personally liable for the business’s debts. Personal assets, such as your house and car, can be used to pay your creditors. On the other hand, Limited Companies are separate legal entities, which means that your potential creditors can only claim against your company’s assets.
How quickly do I need to set up?
The process of forming a company can be more expensive and time-consuming than being self-employed. To form a company in Ireland, you must follow the company set-up process and fulfil your legal obligations, such as having a director, company secretary and share capital, and competing Form A1 and Constitution. Sole Traders need only register for Income Tax through Revenue’s Online System.
How do you shut down a Sole Trader vs a Limited Company?
Shutting down as self-employed involves deregistering for tax and ensuring your finances are in order. To close a company is more complicated, and companies must prepare financial statements and other documentation to complete the “voluntary strike-off” process.
What are the tax implications for each structure? Which aligns better with my financial goals?
There are more tax obligations as a company compares to a self-employed person. But there are also more tax planning opportunities and ways to reduce your tax liability strategically. Depending on your financial goals, consider how much money you need to sustain the lifestyle you want.
Do I prefer a simpler administrative and reporting process, or am I willing to handle more corporate filings and deadlines?
Be aware that you must adhere to strict filing deadlines and financial reporting as a company, such as Corporation Tax Returns, Director’s Returns and Annual Returns. Sole traders are also subject to filing Income Tax returns yearly, but it is less paperwork than a Limited Company.
Is it better to be a Sole Trader or a Limited Company in Ireland?
What is your attitude towards risk?
Are you willing to risk losing your assets if your business hits troubled waters, or would you prefer to protect these assets against any potential creditors? If you want more security in your business, a Limited Company could be for you.
What are your business activities?
For those working in an industry with a higher risk of getting sued for damages due to error, setting up a Limited Company might be your safest bet.
Are you in the professional services industry?
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 a non-resident of Ireland, you cannot register as a Sole Trader, so your only option might be a company.
How long have you been operating your business, and how successful is it?
Setting up a Limited company may be the best option if you are a well-established Sole Trader with rising profits. Think about how much money you make, and if this is higher than the salary you need, consider setting up a Limited Company.
Are you aware of all the compliance obligations?
Keeping your company compliant with all the relevant rules and regulations can be time-consuming and complicated work. Ensure you have a company secretary aware of these various laws. Alternatively, let us be your company secretary and look after the compliance for your company.
Need more help?
There is undoubtedly less legal ‘red tape’ when operating as a Sole Trader in Ireland, but there are limitations on how much you can grow as a self-employed person. Many of our clients have started their businesses as Sole Traders and then changed into Limited Companies, so this is an option too.
Larissa is a Fellow Chartered Accountant (FCA) and is the CEO of Accountant Online, which specialises in company formation, company secretarial, annual accounting services, bookkeeping, tax, and payroll services for micro and small companies in Ireland and the UK.