What is the difference between a Sole Trader and a 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 is more expensive and can be slightly more time-consuming. Although using a company formation agent such as Accountant Online speeds up this process.
If you would like our help deciding which business structure to choose, get in touch with our Client Services Team. We are always happy to discuss the different options.
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 how a Director of a Limited Companies 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 it is called “drawings”. Any money taken out of the business for personal reasons is taxed by the Irish Revenue Commissioners (Revenue). For example, if you earn over €70,000 per year, you could be liable to pay 52% tax on your earnings. Income tax, USC and PRSI are charged on all your earnings (after expenses). Drawings are not the same as employee’s wages as they cannot be deducted as an expense.
If you need help with your tax returns, talk to our Client Services Team about our accountancy services for Sole Traders.
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
Talk to our Client Services Team about the services we offer for new businesses setting up in Ireland. We can talk you through everything you need to ensure your business is set up correctly.
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 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 €159 + VAT per month for the first 18 months after incorporation. After that time, our fees will vary depending on the complexity of your business and the expected turnover.
Receive 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.
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.
Irish Limited Companies benefit from only paying Corporation Tax at 12.5% on company profits (after expenses, pensions, etc) in Ireland. 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 take money out of the company and your accountant can help you with this.
A Sole Trader in Ireland is subject to personal Income Tax rates of 20-40% income tax on all profits (after expenses). This means that everything you earn could be subject to up to 52% tax. This is a lot to pay and you may consider incorporating your business if you end up paying the higher rate of tax.
Limited Companies also have tax refund schemes, such as the Start Up Relief for Entrepreneurs (SURE), that will give companies 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.
Our Client Services Team can talk you through the services you need to set up in Ireland. If you need help deciding which business structure to choose, let us know and we are always happy to help.
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 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. 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 firstname.lastname@example.org.