Sole Trader or Limited Company?

How To Choose The Best Structure For Your Business

Which is the best set-up for your new business – Sole Trader or Limited Company?

It’s easier to start as a Sole Trader and there’s less paperwork to deal with every year. When you’re just starting out it’s often the best solution and you can change to a Limited Company later. However, you might end up paying a higher tax rate in the long term.

Please note that as a Sole Trader you are personally liable for any claim made against the business. Your personal assets (e.g. your home) could be used to settle any unpaid business debts. This is a risk you may prefer to avoid.

Alternatively, as a Limited Company your personal finances are protected because they are separate from the business. In many cases you will benefit from a lower tax rate on your business income. However, there are more steps and regulations to get through when setting up.

We’ve laid out the pros and cons for you below. You can contact us any time for our expert advice.

Pros And Cons Of Forming A Limited Company In Ireland

Pros Of Limited Companies

  • Corporation Tax. Tax doesn’t sound like an advantage, but when you compare corporate tax rates to personal tax rates, it becomes very favorable. A Limited Company pays a Corporate Tax (CT) rate of 12.5% on profits. Whereas personal income tax rates can be between 20 – 40%. PRSI @ 4% and USC of up to 11% means a Sole Trader may have to pay up to 52%. A Limited Company in Ireland pays 12.5% CT on profits.
  • Tax Reliefs and Benefits. Personal tax benefits such as private pension are better for Limited Companies. Company directors can put profits from their businesses into their pensions virtually tax-free. Speak to your accountantand find out how tax planning can save you money.
  • Credibility. Depending on what types of clients you are seeking, a Limited Company has the advantage of more credibility as a business. If you are seeking business from the corporate or public sector, they may even specify that you operate as a Limited Company.
  • Availablilty of Supports and Funding. Limited companies setting up in Ireland tend to benefit from more startup grants and support from government agencies
  • Protection of Company Name. Nobody else is permitted to use the same name as your limited company. This can give you peace of mind that no one can take your company name and dilute your branding.
  • Protection of Your Private Assets. Limited liability for 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 Setting Up As A Limited Company

  • Setting up as a Limited Company requires more steps compared to Sole Traders.
  • 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 Companies Registration Office. However, if the registrar of Companies believes that your home address should remain confidential for any reason, it is possible to request this and 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 a 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 

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 to 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, with the same operational characteristic but with more than one person. 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 with unlimited liability, in a Partnership you are each individually liable for the full debt of the business. Regular profits and losses are shared in proportion to each Partner’s share. There is also an requirement to file a Partnership tax return in addition to your individual form 11 tax return.

Salary Difference – Sole Trader vs Limited Company

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, any money you take from the business is described as ‘drawings’. These ‘drawings’ include what you pay yourself every week/month, plus personal expenses you take from the business. For example, a business lunch.

Many people start out as Sole Traders and then change their business structure later to become a Limited Company. Talking through the options with one of our chartered accountants will help you choose the right option for your business.

Is There A Difference With Accounting Fees?

Accounting fees are generally charged based on 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. This means you know in advance what to expect. Costs for accountancy fees in Ireland can vary quite considerably, so it is worthwhile checking a few different firms and asking for a quotation based on your circumstances.

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.

Perhaps you don’t have the time, skill or staff numbers to keep your accounts up to speed? Then outsourcing your bookkeeping could be the best option.

If you’re a startup 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.

Accounting Fees For Limited Companies

We offer Limited Companies our Startup Offer for accounting services for €49 per month + VAT during the first 6 months of trading. After that time, our fees vary depending on the complexity of your business and the expected 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?

A Sole Trader in Ireland is required to pay between 20 – 40% income tax on all 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?

Once you have decided to incorporate as a limited company, these are the next steps

  • Gather 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. You will also need to have a verified copy of your ID and proof of address for all directors of the company.
  • Choose 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.
  • Find Your Location. If you want to register a company; it must have a registered address in the Republic of Ireland. The Companies Registration Office states that “it is possible to have the registered office placed in the care of an authorised agent”. By having a registered address, you can keep your home address private. We offer this service for less than 17 Euro a month plus VAT, paid annually and you can purchase registered address service here
  • Determine Your Shares. How do you want to split the shares in 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.
  • Choose Your Stakeholders. 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. We offer this service for 1950 Euro + VAT and you can purchase online for immediate processing.

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 was even higher than this figure and was Ireland’s best year ever for new company startups. Most new companies registered in  Ireland in 2017 were in professional services (20% of all start-ups), followed by finance (15%) and social and personal services (11%).

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
  • Lifetime guarantee of service regarding your new company formation
  • Exclusive startup discounts on workspace, web and logo design, printing services and office supplies.

Still Have Questions?

We know it is a big decision to start a new business. This is why we promise to be with you all along the way.  Each month, we hold a webinar dedicated to startups and you are very welcome to join us. It is free, live and is run by a chartered accountant who answers all the important questions you may have: Sign up or read more here about our popular monthly webinars for startups.

Call us on 01 905 9364 with any questions or to schedule a complimentary call with an accountant.