Sole trader v limited – what’s the right choice?
QI Have a new business idea and I have drafted my business plan. Would it be best for me to set up as a Sole trader or Limited Company? Can you outline the differences?
ATHERE are two main options open to entrepreneurs setting up in Ireland – sole trader or limited company. I will briefly outline the differences between the two and the issues you need to consider when making a decision on which structure to choose.
Sole Trader: This is the simplest option. To set up as a sole trader, you will need to register as a sole trader with the Revenue Commissioners and submit an income tax return once a year (deadline 31 October of the following tax year). The books are generally easier to maintain and don’t have to be audited. As a result, accountancy fees should be lower than for other structures. Some sole traders register their business name with the CRO. Closing down the business is relatively straightforward.
Limited Company: This is a legal entity separate to yourself and shareholders liabilities are limited to the amount of shares they subscribe for. With a limited company if you are setting up in business on your own, you will need to find another person to act as a Company Secretary although you can own 100% of the shares in the company yourself in a single member company.
A limited company and its directors are subject to more regulation than a sole trader but the company structure offers advantages in terms of taxation. A simple example of this is if the business is making more money than the director-owners need then the excess is taxed at 12.5% in a company rather than a potential income tax of 20%/40% plus USC plus PRSI for a sole trader. The Company can avail of tax relief at 12.5% if they set up a pension contribution through the company.
Every year, Financial Statements (accounts) will need to be prepared together with a Corporation Tax return and an Annual Return to the Companies Registration Office. Companies which do require an audit include:
- Companies who submitted their annual return to the CRO late in the current or previous year;
- Generally, companies who do not meet 2 of the 3 size criteria: turnover exceeding €8.8 million, net assets greater than €4.4 million and average number of employees of 50 or more;
- Group companies where the group as a whole does not meet the above size criteria;
- Banking / insurance companies and other credit institutions who are regulated by the Central Bank.
Issues to consider when deciding on legal structure:
- Will the business make sufficient profits (now or in the future) to justify the additional expense of running a company?
- Is a company structure required for a grant application or is there a potential investor in the wings?
- Are you willing to deal with the paperwork associated with the business in a timely manner or will you outsource/delegate this to someone else?
- Do you want to protect the business name by registering a company?
- Do you accept that the company’s accounts will be filed on public record at the CRO?
Is limited liability important in your industry sector?