Sole trader vs limited company Ireland

Introduction

There are a number of benefits and disadvantages of each. The best option will depend on your situation. Generally, if you are starting a business by yourself with little financial risk which will generate an income under €50,000 and you don’t need to keep money in the business a sole trader will be the better option.

In the future you can change to a limited company whenever you want. The process is straight forward and isn’t costly. However, it is important you’re aware of the advantages of both as your situation could be different. There are significant tax advantages in having a limited company depending on your situation.

If you want to start a company with multiple people, get a significant level of funding and will have a high level of risk a limited company will be the better option.

It’s important to note, you do not need to have a limited company to have a business. Anyone can start a business once you register as being self-employed with revenue and register a business name with the CRO.

 

In this article we will discuss which situations are suitable for a sole trader and a limited company and why. Below is an example of two identical businesses, one a sole trader and the other a limited company.The example will show the total tax paid, your total salary and the total available for reinvestment.

Advantages of a limited company in Ireland

  • A limited company has limited liability meaning you can only lose what you invest. Your personal assets are protected.
  • In general, a limited company has better access to funds
  • Unlike a sole trader, a limited company continues after death of the owner
  • A limited company has clear legal ownership for multiple founders
  • With a limited company there are higher tax credits available for directors
  • A limited company has a better perception among customers and suppliers
  • The profits of a limited company are taxed at 12.5%
  • With a limited company your salary is tax deductible

Disadvantages of a limited company in Ireland

  • A limited company has higher costs – Company formation and CRO filing results in higher accounting fees
  • A limited company is subject to penalties for late filings eg if you file a return late with the CRO you could lose your audit exemption. An audit set of accounts can cost €2,500 + VAT even for a shell company with 0 transactions.
  • A limited company has less privacy. Because you have to file a set of accounts more information about your company is made public. Anyone can download a set of accounts from the CRO for roughly €12 through their company search.
  • A limited company needs to register as as an employer

Advantages of a sole trader in Ireland

  • A sole trader is easier to setup
  • Less filing required – no annual accounts. (But you still need to do an annual return to revenue)
  • As there are no annual accounts your earnings are private
  • The costs to get started are much less
  • You do not need to register as an employer
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Disadvantages of a sole trader in Ireland

  • You are personally liable for all the debts of the business. Unlike a limited company, you can only lose what you invest.
  • It is more difficult to keep any profits in the business because all profits will be taxed at either 20% or 40% depending on how much your earn v 12.5% corporate tax limited companies pay.
  • You have less take credits than directors of a limited company
  • It can be more difficult to access funding. For example, to qualify for startup funding you need to be a limited company in some cases.
  • Your salary is not tax deductible

Tax Advantages of a limited company over a sole trader in Ireland

The above example shows to businesses each earning €100,000. One business is a sole trader and the other business is a limited company. The main advantage the limited company has over the sole trader is it’s ability to keep money in the business. In addition, as a director of a company you have higher tax credits (€3,300 v €1,350). However, these benefits are offset by higher accounting fees (company formation + CRO annual filing) in year one.

The big difference to note from above are:

  • As a sole trader it’s very important to note you cannot expense your salary whereas with a limited company you can. This will then reduce your taxable profits, reducing the total tax you need to pay.
  • A limited company also makes it easier to keep money in the business for reinvestment in future years. A sole trader tax rate can be up to 40%, 20% (up to €35,300) and 40% (above €35,300). In a limited company, profits are taxed at 12.5%.
  • You may also have the option to available of relief from corporate tax relief. For more information see revenue’s website.

     

Is it better for my business to be a sole trader or a limited company?

The answer is it depends on your situation. A sole trader will be the better option if:

  • The majority of the income generated by the business comes from a service supplied by yourself. eg graphic designer, web developer, accountant etc.
  • Your income after expenses will be less than €50,000
  • There is a very low risk of you having debts which you cannot pay ie there is not risk of you losing your personal assets
  • You do not require to funds to be carried over for a long period of time to be reinvested into the business
  • You do not require funding from third parties
  • If you are a new business with little or no sales

Changing from a sole trader to a limited company

Having discussed the pros & cons of setting up a limited company in Ireland, a limited company will be the better option when:

  • Your limited company will generate profits above €50,000
  • You will need to have multiple founders who will owner shares in your limited company
  • If you will need funding to start your limited company
  • Will you want to keep your profits in the business for future reinvestment?
  • If there is a risk your business will not be able to pay its debts, a limited company can protect your personal assets

Changing from a sole trader to a limited company in Ireland

When you are changing from a sole trader to a limited company you may need to transfer assets to the limited company. This transfer could result in a capital gains liability.

S600 TCA 1997 Transfer of Business Relief, allows for relief on capital gains on the transfer of assets. The assets transferred into the new limited company must exchanged for shares in the company. Effectively, any capital gains are deferred until the shares in the new limited company are sold.

There are a number of conditions, please take note of the following:

 

  • The business must be transferred from a sole trader (or partnership) to the limited company
  • The transfer must be for commercial reasons and not to avoid any tax liability
  • The business must be transferred as a going concern ie the company will continue to operate after the transfer
  • All assets of the sole trader must be transferred (excluding cash)
  • Assets must be transferred in exchange for shares in the newly formed limited company

Retirement Relief on disposal of assets

Retirement relief is available to those who dispose of qualifying assets in a business. The relief gives you an exemption from any CGT which arises on the disposal of assets.

The relief is based on the following conditions

  • You must be at least 55 on the disposal of assets
  • You must have owner the company for at least 10 years

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