Sole Trader vs Limited Company? What are the differences and why should I register as a limited company?
This is the million-dollar question faced by Irish residents in a start-up scenario. It depends on numerous factors such as your type of business, whether you’re still going to be in other employment, likelihood of success, projected turnover, whether you have investors now or in future, whether you want to put profits into a pension, etc.
The best advice we can give is to talk to an Accountant or Tax Advisor. Preferably a good one! A good Accountant will evaluate your business and give you the pros and cons of your type of business. If you want us to put you in touch with a good Accountant in your area please don’t hesitate to contact us. We have a network of contacts around the country whom we work with.
The main difference is that a Limited Company is a separate legal entity from the individuals involved (Directors and Shareholders) A Limited Company needs to make Annual Returns with the Companies Office and there is more compliance and red tape, however, they are generally thought to be the most tax efficient. For example, Company Directors can put profits into their pensions virtually tax-free (within reason of course!)
If you register as a Sole Trader or a Partnership you will need to register a Business Name if you are carrying out business under a name other than your own e.g. ‘John Smith Carpentry’ as opposed to just ‘John Smith’ You and your business are legally and financially the same person, so you don’t have ‘limited liability’ like you do with a Limited Company.
Advantages of a limited company:
– Limited liability. This means that the liability of the shareholders is limited to the amount paid for shares. This can only be changed if Directors have traded fraudulently or negligently, or if they continue to trade when the company has been struck-off.
– Low corporation tax. The rate of corporate tax in Ireland is only 12.5%
– The business is a separate legal entity from the people involved (Directors & shareholders)
– The company name is protected. Nobody else can use the name as a limited company name.
– Excellent tax breaks for Directors on company pensions.
– Business can appear more credible when bidding for tenders, signing contracts, etc.
– Clear and defined ownership and duties.
Disadvantages of Limited Company:
– Compliance. there is more compliance necessary with a limited company. Annual Returns have to be filed with the CRO, etc.
– There are higher costs to open and close the business.
Advantages of Sole Trader/Partnership:
– Simple and cheap to register and maintain
– Minimal cost to close the business if required
– No annual returns to file with CRO
Disadvantages of Sole Trader/Partnership:
– No Limited liability. No limit on personal liability for the debts of the business
– Profit is taxed at personal tax rates (up to 52%) instead of corporation tax at 12.5%.
– Limited scope to avail of pension tax breaks and executive pensions
– Not be suitable for certain contractors who need a limited company
– May not be considered as credible as a limited company when tendering for contracts, etc.