Sole Trader or 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.

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.