Do you have a business idea or plan but wondering should you set up as 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.
What is the difference between Sole Trader and Limited Company?
One of the biggest differences is that Sole Traders are personally liable to the debts of the business. Personal assets, such as your house and car, can potentially be used to pay your creditors.
On the other hand, Limited Companies are separate legal entities. This means that your potential creditors can only claim against the assets of your company.
Initially, setting up as a Limited Company can be more expensive and can be slightly more time-consuming. But there is also more security around your personal assets, it can provide more credibility in your industry and there are more tax incentives.
There is certainly less legal ‘red tape’ when operating as 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 business as a Sole Trader and then changed into a Limited Company, so this is an option too.
Pros and cons of each structure
- Simple to set up & shut down
- Less legal filings compared to a Limited Company
- You don’t have to prepare financial statements
- 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
- 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
Sole Trader earnings
Everything a Sole Trader earns is considered to be your income and anything you use for personal reasons is called “drawings”.
Tax on your earnings is paid to the Irish Revenue Commissioners (Revenue) through an income tax return, AKA Form 11. The deadline for the income tax return is the 31st of October or mid-November if you pay and file through Revenue’s Online System (ROS).
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). Sole Traders are also required to pay Preliminary Tax at the end of the year which can be a shock if you aren’t prepared for it.
It’s also good to note that drawings are not the same as employee’s wages as they cannot be deducted as an expense.
Limited Company profit and directors' salary
As a company, the money it earns adds to the company’s turnover/profit. As a director of a company, you can pay yourself in different ways.
You can take a salary, dividend or contribute to a pension through the company. It’s good to note that if you take a salary, it is a tax-deductible expense.
- 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.
Talking to your accountant is a great way to decide how to pay yourself in the most tax-efficient way. Your accountant can give you advice for future-planning and how to cut down your tax bill at the end of the year.
Fees for Sole Traders
Sole Trader accountants usually take care of your Income Tax return, 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 Companies Registration Office (CRO).
Fees for Limited Companies
There are more compliance requirements for Limited Companies and the cost to outsource all your obligations can get costly. As well as that, Revenue and the CRO will penalise your company if you miss them, so it’s important you’re aware of your obligations.
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.
Limited Company taxes
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.
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 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.
Changing from Sole Trader to Limited Company
You can start your business as a Sole Trader and then change to a Limited Company at a later stage.
You’ll know it’s time to change when your business is growing and you’re earning above the higher rate of tax. Changing into a company means you will have more control over how to pay yourself and therefore, be more tax-efficient.
As well as that, when you’re growing, you may benefit from the protection of limited liability. When you’re a company, you’re not personally liable for the debts of the business.
If you would like to chat about this in more detail, talk to our Client Services team. We’re here to help you on this journey.
Where to start?
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)1 905 9364 or email firstname.lastname@example.org.