Should you set up a Sole Trader or Limited Company?
Sole Trader and Limited Companies are two of the most common business structures in Ireland. If you’re just starting out, you may be wondering what is the best option for you.
We have helped hundreds of businesses on their business journey so we have a lot of experience with this decision.
In this guide, we’ll help you figure out the best structure for your business. At the end of the day, it is a personal choice, but you may favour one structure over another when you hear about the differences.
If you have any questions before deciding, talk to our Client Services team about your situation. It may help to speak to someone about your situation.
Main differences between Sole Trader and Limited Company
- Structure. As a Sole Trader, you are setting up a business in your own name and you are personally liable for the business. When you register a Limited Company, you are setting up a separate entity and you can appoint yourself as a director. You can still be the sole owner, but you will have limited liability. This means that you have legal protection against personal liability.
- Setup process. It is straightforward and easy to set up as a Sole Trader. If you have an existing PPSN and ROS / MyAccount, you can set up relatively quickly. New companies need to submit forms to the Companies Registration Office (CRO). Registering as a company is different from registering as a Sole Trader, but the additional steps provide protection for directors, more growth opportunities, and creditability in the market.
- Earnings. Sole Trader’s income can be taxed up to 55% – everything that a Sole Trader earns (minus expenses) is your income. Limited Companies can plan their salary and structure their finances, so they pay less tax. Consider your expected earnings – if it meets the higher tax rates, we recommend that you set up as a Limited Company.
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 visble to the public
Disadvantages of Sole Trader
- There is no legal difference between you and your business
- Unlimited liability - your personal 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 be 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 - you have some personal protection from 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 creditibility in the industry
- Increased eligiblility for government schemes and grants
- More likely to be approved for credit
- More options for exit planning and succession
- Partial protection over company name
Disadvantages of Limited Company
- More corporate filings and deadlines
- Public have 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
- If you sell shares in your company, you may lose a portion of your ownership
How to decide between Sole Trader and Limited
Here are some tips on how to decide if you should be a Sole Trader or Limited Company in Ireland. If you need specific advice about your situation, talk to our Client Services Team – we’re always happy to help you!
1. Consider your expected level of income - how much will you pay yourself?
This is an important factor to consider because the level of income will determine the rate of tax you will pay.
As a Sole Trader, everything you earn is considered income, and all your income (minus expenses) is liable to income tax up to 55%. Anything that you use for personal reasons is called “drawings”. Drawings are not the same as employees’ wages as they cannot be deducted as a tax-deductible business expense.
As a director of a Limited Company, you can pay yourself a salary, 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 so it will lower your tax bill at the end of the year.
You also have the option to take dividends and contribute to a pension, and we recommend that you talk to your accountant to learn more about these options as they can differ depending on your personal situation.
Sole Trader taxes vs Limited Company taxes
As mentioned above, as a Sole Trader, everything that you earn (minus expenses) is liable to income tax. Depending on how much you earn, 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%. Note, that if the directors are resident in Ireland, you are likely to pay Corporation Tax at 12.5%, which is a huge 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.
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.
2. Set expectations on what you do yourself and what you can afford to outsource
If you are bootstrapping, we understand that you may take on as much as possible yourself, so you can save on costs. We recommend that you set expectations on what you can do yourself, and what you need to outsource. You can always reach out to our Client Services Team to discuss your requirements and we’re happy to guide you on the right path for your situation.
When you set up a company in Ireland, there are more accounting and compliance requirements when compared to a Sole Trader. Take into consideration the costs of setting up a company and the cost of maintaining its annual compliance requirements. How much financial knowledge do you currently have and what is your budget for outsourcing?
Both Sole Traders and Limited Companies have strict filing deadlines and you need to file tax returns even if you don’t have a profit or you have minimal trading activity. Failure to meet your deadlines will incur fines and penalties, and paying fines could harm your cash flow when you are just starting out.
Working with an accountant is a top priority for many new business owners because it provides you with a professional advisor to go to for support and guidance. Look for an accountant that goes beyond standard compliance and provides a proactive service, such as webinars, masterclasses, and workshops, so you can get value for money and grow your own expertise.
Sole trader fees vs Limited Company fees
Whether you choose to be a Sole Trader or Limited Company, you may start out the same way – minimal invoices, a handful of expenses, and many grueling hours trying to get your business off the ground.
This is why many of our clients decide to take on the bookkeeping themselves for the first year and outsource the tax returns and compliance to us. This gives you peace of mind that your deadlines are covered and you can focus on the day-to-day running of your business.
Look for an accountant with fixed fees, so there are no hidden surprises. In most instances, your accountant will look after your Income Tax Returns, Corporation Tax Returns, VAT Returns, Payroll, and Bookkeeping.
3. Consider where you see your business in the next 5, 10, 15, years
In many cases, registering as a Sole Trader is a suitable and even, an 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.
However, if you have plans for growth, 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.
Talk to our Client Service Team if you are not sure which business structure to choose, we can talk to you about your situation and help you come to the right decision.
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?
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 likely to be higher than the salary you need, you should 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 is a lot of work. Make sure you have a company secretary who is aware of these various laws. Alternatively, let us be your company secretary and look after the compliance for your company.