What is the difference between Sole Trader and Limited Company?
Sole Traders 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.
Limited Companies are separate legal entities. 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 in Ireland. Initially, setting up as a Limited Company can be more expensive and can be slightly more time-consuming. Although using a company formation agent such as Accountant Online speeds up this process.
So even though you may be spending more opening and maintaining a company, it may be less risky to set up as a Limited Company.
Keep reading to find out more differences between the two business structures so you can make an informed decision.
Pros and cons of Sole Trader & Limited Company
- All your profits are taxed as your income, which can be up to 52%
- Personally liable for debts
- Lower tax credit than employees
- You still need to prepare a tax return each year
- 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
The different ways to take money out of your business
There are fundamental differences in how a Director takes money out of their business compared to a Sole Trader. How you pay yourself is a big deciding factor on whether you should set up as a Sole Trader or Limited Company.
Everything a Sole Trader earns is considered to be their income and anything you use for personal reasons is called “drawings”.
You then pay tax on your earnings to the Irish Revenue Commissioners (Revenue) at the end of the year. This is done through an Income Tax return, AKA Form 11.
For example, if you earn over €70,000 per year, you could be liable to pay 52% tax on your earnings. Income tax, Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) are charged on all your earnings (after expenses).
It’s also good to note that drawings are not the same as employee’s wages as they cannot be deducted as an expense.
As a Director, you can pay yourself a salary, distribute dividends, and contribute to a pension from your Limited Company. There are more options for taking money out of a company, therefore more scope for tax-planning and planning for the future.
- A salary is a fixed annual payment at regular intervals, e.g. weekly or monthly payments
- Dividends are paid to shareholders of companies and it is very common for shareholders and Directors to be the same people in small companies
- Directors can make two types of pension contributions: employer contributes and personal contributions
The difference in accountancy fees
If you're a 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 accountants usually take care of your Income Tax return and VAT returns and payroll, if required. Accountancy fees are usually based on turnover and the level of cash transactions so you may need to contact your accountant to get an exact quote.
Sometimes Sole Traders ask their accountant to Register A Business Name and this is usually an additional cost.
Check out our Sole Trader Starter Offer if you’re interested in outsourcing your accountancy requirements. This offer includes Income Tax registration, annual Income Tax return, and registering a business name with the CRO.
Fees for Limited Companies
There are more compliance requirements for Limited Companies and the cost to outsource all your obligations can get costly. But it is important that your deadlines are maintained because Revenue and the CRO will penalise your company if you miss them.
Limited Company accountants will take care of your annual compliance (Corporation Tax Return and Annual Return), and VAT returns and payroll, if required.
Accountants can also help you set up your company and provide company secretarial and address services. If you choose to outsource these services it will add to your monthly bill, but a very necessary cost in most cases.
Need help finding the right accountant?
When you’re trying to find the right accountant, look for one that offers fixed monthly fees. This means you can pay your bill in monthly instalments instead of paying out a lump sum at the end of the year. Remember you need to have money to pay your taxes too!
Feel free to get in touch if you’d like a quotation. Our full-service accountancy package includes all compliance requirements, VAT returns, payroll, and Directors Returns.
The difference in tax liability
One of the main differences between Sole Traders and Limited Companies is the way they pay their tax throughout the year.
Limited Company taxes
Irish Limited Companies benefit from only paying Irish Corporation Tax at 12.5% on company profits (after expenses, pensions, etc). Then if a Director takes a salary, they are subject to the same personal Income Tax rates as an employee. But as mentioned, there are tax-efficient ways to pay yourself from a company and your accountant can help you with this.
Sole Trader taxes
Sole Traders in Ireland are subject to personal Income Tax rates of 20-40% income tax on all profits (after expenses), plus USC and PRSI charges. Depending on how much you earn, you could be subject to up to 52% tax. This is a lot to pay and you may consider changing from Sole Trader to Limited Company if you end up paying the higher rate of tax.
Value Added Tax (VAT)
Both Sole Traders and Limited Companies may need to register for VAT if they meet certain criteria.
This is a tax paid on goods and services in Ireland. If your business is registered for VAT then you must charge VAT on everything you sell. You can also claim back the VAT on business expenses.
Your VAT liability will depend on how much you have sold and purchased each month.
Again, not all businesses will have a payroll/PAYE liability. If you don’t hire any staff, then you wouldn’t be a registered employer, and therefore you wouldn’t have a PAYE liability.
Sole Traders and Limited Companies can hire employees and operate a payroll system. When you’re a registered employer, you need to calculate and deduct Income Tax, USC, PRSI from your employees’ wages’ on behalf of Revenue. This tax is paid to Revenue in a PAYE return and includes employers’ PRSI liabilities too.
What about incentives for new businesses?
Start Up Relief for Entrepreneurs (SURE)
Limited Companies have tax refund schemes, such as the Start Up Relief for Entrepreneurs (SURE), that will give investors a refund on Income Tax paid over 6 years prior to setting up the company.
This scheme is not available for businesses that start as Sole Traders and then switch to Limited Companies. So you need to set up as a company straight away if you are eligible for this refund.
Back to Work Enterprise Allowance
Individuals who have been getting certain social welfare payments can apply to receive the Back to Work Enterprise Allowance (BTWEA). This scheme is made available through the Department of Employment Affairs and Social Protection (DEASP) and is designed to encourage people on social welfare to become self-employed.
Short-Term Enterprise Allowance
This support is for people who have lost their job and want to start their own business and become self-employed. To qualify for Short-Term Enterprise Allowance you must be getting Jobseeker’s Benefit and is paid for a maximum of nine months.
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 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 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 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. Think about how much money you make and if this likely to be higher than the salary you need, you should consider setting up a Limited Company. 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.
Changing from Sole Trader to 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.
What do I need to do next?
The next step after you’ve decided to set up as a Sole Trader or Limited Company is to register your business. Sole Traders register as self-employed with Revenue and Limited Companies need to register with the Companies Registration Office.
We can help you with your business set up requirements. Talk to our Client Services Team about the services you need to get your business started today.
Call us on +353 (0) 1905 9364 or email email@example.com.