When starting your own business, which structure should you choose – Sole Trader, Limited Company or Partnership?
What Are The Differences Between A Sole Trader And Limited Company?
“This is a key question for many of our clients,” says Accountant Online founder and CEO Larissa Feeney. “To put it simply, the benefit of starting out as a sole trader is that it is quicker and easier if you are doing it all yourself. But it may cost you in higher taxes and greater liabilities for claims against your business.”
As a sole trader you will be personally liable for the debts of your business. In other words, your personal assets (e.g. your home) can be used to settle any financial issues your business is facing. This is a risk many people may not wish to take.
“On the other hand, there are a lot more steps and regulations involved in setting up a company in Ireland, unless you outsource some of this hard work. However, the benefit is that you will pay much lower rates of tax and may be better protected against liabilities.”
To make the Sole Trader vs Limited Company decision easier for you, here is a summary of key points to highlight the differences, advantages and disadvantages for becoming a Sole Trader or Limited Company in Ireland.
Pros And Cons Of Forming A Limited Company In Ireland
Pros Of Limited Company Formation
- The main benefit of a limited company is getting a Corporate Tax (CT) rate of 12.5% on profits
- This benefit compares very favourably to personal income tax rates of between 20 – 40% as well as PRSI @ 4% and USC of up to 11%. A sole trader pays up to 52% on all their income after expenses, whereas a limited company in Ireland pays 12.5% CT on profits.
- Personal tax benefits such as private pension are better. This allows company directors to put profits into their pensions virtually tax-free
- A limited company has the advantage of more credibility as a business. If you are seeking business from corporate or public sectors, they often insist that you operate as a limited company
- Limited companies setting up in Ireland benefit from more startup grants and support e.g. the New Frontiers programme
- Protection of your company name. Nobody else is permitted to use the same name as your limited company
- Limited liability on claims against your business. Personal assets of directors or shareholders generally cannot be seized to pay off company debts. However, there are exceptions to this (e.g. where directors are deemed to have been trading recklessly, or if directors have signed a personal guarantee). It would be normal for banks to ask for a personal guarantee for overdrafts/loans and some trade suppliers may also seek personal guarantees.
Cons Of Limited Company Formation
- Setting up a limited company has more steps involved than a sole trader in Ireland
- There are significantly more ongoing statutory requirements in order to keep your business compliant with Revenue and the Companies Registration Office (CRO)
- There are formal company secretarial requirements that add to the cost of running your business and closing it down
- A company officer or board member has far more legal responsibilities than a sole trader in Ireland
- Disclosure of personal information and trading information. Once you are a director of a company, any member of the public can find out your date of birth, your home address and information about your business from your published accounts in the CRO. However, if the registrar of Companies believes that your home address should remain confidential for any reason, we can arrange this application for you
- Even though you do pay less corporation tax as a limited company, you also must pay tax on the salary you pay yourself (if this is how you plan on taking money out of the business). The benefits here really depend on how much money the business is generating and whether you want to take money out in dividends or salary.
Pros And Cons Of Being A Sole Trader/Partnership
Pros Of Sole Trader/Partnership
- The process for setting up a sole trader or partnership is the simplest way of setting up a business in Ireland
- Closing down the business is also very simple
- You don’t need to file annual returns with the Companies Registration Office (CRO)
- Your accounts are not subject to an audit
- You can use your own name or register a business name which Accountant Online can take care of for you
Cons Of Sole Trader/Partnership
- You are personally liable for all debts. Your personal assets are at risk if there is a claim against the business.
- You do still need to keep proper books and records and to file tax returns and pay VAT; if applicable
- Income tax is applicable on personal tax rates of between 20 – 40% as well as PRSI of 4% and USC of up to 11%
- If your business fails, it may be more difficult to obtain social welfare than if you are an employee who has been made redundant.
- Loss of PAYE credit. Employees currently have a PAYE credit of €1,650 versus a tax credit of €1,150 for the self-employed (Budget 2018).
What Is A Partnership?
Think of a Partnership as being like a Sole Trader, but there is more than one person. A partnership has the same characteristics of being a sole trader.
It shares the risk between you and the other partners, which you may see as a benefit. However, keep in mind that just as a sole trader bears all the risk and has no limited liability, a partnership means that each partner is liable in proportion to their share of the business’s gains and losses. You are each individually liable for the full debt of the business. There is also an additional requirement to file a partnership tax return in addition to your individual form 11 tax returns.
Salary Difference – Sole Trader vs Limited Company
Larissa says that business startups often base their choice of business structure on issues such as how they wish to receive payment.
“For example, if you incorporate your company, then you are an employee with a salary. If you are a sole trader, you describe any money you take from the business as ‘drawings’. These ‘drawings’ include what you pay yourself every week or month, plus personal expenses you take from the business, such as a business lunch”
“Some people start out as sole traders and then change their business structure later to set up a Limited Company. Talking through the options with one of our chartered accountants will help you choose the right option for your business,” she adds.
Are Accounting Fees Higher For a Sole Trader or Limited Company?
Accounting fees are generally charged at the length of time it takes the accountant to finish all the work involved. The difference you should look for when choosing an accounting firm however, is to select one with a transparent fee structure. This way you can receive a reliable quote for costs.
Accounting Fees For Sole Trader
Accountancy services for sole traders may command a lower fee dependent on the type of turnover and business complexity. If you are just starting out, check out our list of small business packages or find out how to save money on accounting fees.
If you simply don’t have the time, skill or staff numbers to keep your accounts up to speed then bookkeeping or outsourcing could be the best option.
Accountant Online operates on a fixed fee basis so that you know how much to budget. We deduct a monthly fee to help your cash-flow and to avoid a price shock at the end of the tax year. If you’re a startup sole trader, limited company, it’s a good idea have fixed costs per month so you can keep track of your expenditure.
Accounting Fees For Limited Companies
We offer limited companies our accounting services for €25 per month + VAT during the first 6 months of trading. After that time, our fees for limited companies vary depending on the complexity of your business and the size of your turnover.
For example, with a sales turnover of around €80,000 per year, the cost is €55 + VAT per month. This includes all compliance requirements, Financial Statements, Tax Returns and Annual Returns.
Tax Advantages For Limited Companies In Ireland
We often get asked the question, will I pay less tax if I’m a limited company?
The disadvantage for a sole trader is that you are required to pay between 20 – 40% income tax on your profits. In addition, you must add USC of up to 11% and PRSI of 4%.
On the other hand, limited companies benefit because they only pay corporation tax in Ireland at 12.5% on company profits. Furthermore, new limited companies may qualify for relief from corporation tax for the first 3 years of trading, depending on conditions. We recommend that you get in contact with our office in Dublin to find out more about how you can benefit from incorporating your company.
Ready To Start A Limited Company – What Are The Next Steps?
When setting up a company online, the next steps are:
- Documentation – Identify the documentation required to register an Irish limited company. In summary, you need personal details of all directors, including their PPS numbers, addresses and birth dates.
- Choosing your company name – Pick a few names that you like. We will do a free company name check for you to make sure it is available.
- Where – If you want to register a company; it must have a registered address in the Republic of Ireland. The CRO states that “it is possible to have the registered office placed in the care of an authorised agent”. Accountant Online can be your registered address for approximately €25 per month + VAT.
- Shares – How do you want to split the shares of the company? We usually advise that you issue 100 shares of 1 Euro in value and have authorised shares of 10,000. This just means that if you want to ‘issue’ shares later, you have lots available to issue. You can change this later at any time.
- Directors – You must have at least one director and one company secretary. At least one director should be a resident of a Member state of the EEA. If none of the directors are resident in a Member state, a bond of €25,000 is required.
For more information, check out the company formation service guide. Learn about the costs involved, how to choose the best company formation service for you and what steps to take next.
Want To Register A Limited Company In Ireland?
In 2016, the number of new startups in Ireland exceeded 20,000 for the first time in nearly two decades. 2017 is on track to be even higher.
Are you ready to turn your business idea into a limited company and benefit from the advantages linked to it?
Our Company Formation Package Includes
- Certificate of Incorporation
- Company Constitution
- Share Certificates
- Schedule of Company Officers
- Secure Digital Register
- Corporation Tax Registration
- First Annual Return
- Lifetime guarantee of service regarding your new company formation
- Exclusive startup discounts on workspace, web and logo design, printing services and office supplies.
- One week formation
Still Have Questions?
Accountant Online is a firm of award winning Chartered Accountants serving Ireland and the UK. We understand how important it is for you to meet your compliance obligations, while minimizing your tax liability. We aim to save our clients money without compromising on the quality of our service. Get in touch on 01 905 9364 or send an email to email@example.com. Find us on Twitter, Facebook and LinkedIn.