Sole Trader v Limited Company

So you have a new business idea and have sketched a brief business plan.

What are your options in terms of structure and how do you decide which one is right for you?

There are two main options open to entrepreneurs setting up in Ireland – sole trader and 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

Sole trader 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. For example, florist Claire Thomas might register the name Blooming Marvellous. (This is NOT the same as setting up a company.) The business name certificate should be displayed at the place of business and a copy given to the bank. Note that there is no restriction on registering a duplicate business name. However, a company name must be unique.

Closing down the business is relatively straightforward.

See Registering a Business Name.

Limited Company (Click here for company formation form)

A limited company is a legal entity separate to yourself and shareholders liabilities are limited to the amount of share they subscribe. 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 director although you can own 100% of the shares in the company yourself (single member company). Make sure that you and the other director(s) know what they are getting into as they have legal rights and obligations as the director of a company. See 4 Things Every Director Should Know.

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%/41% plus income levy plus PRSI for a sole trader.

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. Most small companies don’t need to get their accounts audited. Companies which do require an audit include:

  • Companies who submitted their annual return to the CRO late in the current or previous year
  • Companies with a turnover exceeding €7.3 million, assets greater than €3.65 million and average number of employees of 50 or more
  • Companies limited by guarantee (e.g. sports clubs, charities)
  • Group companies
  • Banking / insurance companies
  • Unlimited companies

The company structure does require more accounting and tax work but the additional fees involved should be more than covered by the tax savings in running the business through a company.

The company also provides a structure for introducing additional investors, giving shares to key employees or family members and selling shares in the business.

Closing down a company is more difficult and expensive than for a sole trader especially where there are outstanding debts and a liquidator is required.

Potential Pitfall 1: Company directors need to be mindful that the money in the company’s bank accounts are not their personal funds. Directors should only withdraw money from the company as part of a salary, dividend, reimbursement for motor and travel expenses or repayment of a loan given to the company. Any payments in excess of these could contravene the Companies Acts and trigger a tax liability. Always seek professional advice before withdrawing money from the company. See www.odce.ie for details of directors who have fallen foul of this legislation.

Potential Pitfall 2: Remember that most directors need to also submit an Income Tax return even if their only income is a salary from the company. Surcharges and penalties can result

for non submission of Income Tax returns even if all the tax has been paid through the company payroll.

Some issues to consider when making a decision 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?
  • Is there a good marketing reason to trade through a company rather than as a sole trader?
  • 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 (although these will be abridged for small companies)?
  • Is limited liability important in your industry sector?

This is just a summary of the issues we come across most often. You can find more information on the advantages and disadvantages of a limited company on www.parfreymurphy.ie/advantages-and-disadvantages-of-a-limited-company. For more information on the responsibilities of directors see www.odce.ie.

Update: Mileage and subsistence rates can be found here. These can be claimed by directors and employees but not sole traders. Sole traders need to keep receipts for motor expenses.

Don’t forget that new start-up companies which commence trading in 2009 and 2010 will be exempt from tax, including capital gains, in each of the first three years to the extent that their tax liability in the year does not exceed €40,000.

See also:

Registering a Sole Trader

Registering a Business Name

Forming a Company

24 thoughts on “Sole Trader v Limited Company

  1. Pingback: Setting up New Company in Ireland | Running a Business in Ireland

  2. Hi Orla

    Myself and a friend are both employees of the same company. We have now also set up a small partnership for a business idea we had. We have registered for Income tax. What returns etc do we have to make & how do we go about doing it as we are also PAYE workers.

    Thanks
    Mary

    • Hi Mary,

      You will each need to submit an Income Tax return in October which will contain all your income – your partnership and employee income. You will also need to submit a Partnership return. If you need any assistance with this, please let me know.

      I presume that as you are just starting out, you are not yet registered for VAT.

      Best regards,

      Seamus

  3. Hi Orla,

    I have a question with regard to other pitfalls of becomming a company director but am not sure if I am on the right track with forwarding a query to you, however, here goes..

    My brother is thinking of starting up a new business as his current employer has indicated that he may have to let him go. He has worked solidly for over twenty years having never received social benefits. Hence, is looking at starting up a limited company with himself and his wife as directors.

    Do you know if it is possible in Ireland, for a director, to recieve social benefits if in the future the company is unsucessful?

    Thanking you kindly in advance,

    Sinead

    • Hi Paula,

      I would suggest that you have a look at our blog post on Closing Down a Company which outlines the ways of closing down a company.

      If you wish to commence trading as a sole trader you will be required to register as a sole trader for income tax purposes and possibly for VAT and also as an employer. Please see our blog post Registering as a Sole Trader.

      I hope this above is some help to you.

      Regards,

      David

  4. hi im workin and so is my wife we are lookin to set up small buisness as well would sole trader or ltd company be better for us as we both work already

  5. Hi

    I own 2 websites and have another in the pipeline.Im working on driving traffic to them at the moment, all 3 will have money making potential in the near future.

    My question is can i set up as a sole trader or do i need to set up a holding company for the websites.

    Also i work full-time and plan to keep my job and run the websites.

    Regards,

    Colin.

  6. Hi,
    I want to set up a company that only trades or just a resale company. Is it best to start as a sole trader then if making money register the business as a limited company?
    David

    • Hi David,
      You could initially start off as a sole trader to see if your business is viable. You can easily transfer your business to a limited company at a later date but there may be tax issues on the transfer which need you will need to get professional advice on. Company formation is easy and can be quickly done. Feel free to give us a call on 021-4310266 if you need company formation assistance.
      Fiona

  7. Hi
    I am in the process of setting up a business, wondered if you could help with a couple of questions

    Firstly, in the initial stages, I will be operating a ” virtual” business…ie…won’t have premises as such…..will look at this further down the line. If I want to register / start a company, do I need a physical address? I currently rent the house I live in and cannot use the address for a business…..

    Also, I will register one company name, but will have 3 or possibly 4 businesses running under different names….Is it as simple as xxxxx is a trading name of the name I have registered? If so, the money from each business will all go into the one “pot”, ie the registered business name….will this work / is it permitted?

    Finally, I plan to register the registered company for VAT, will each trading name require a different VAT number? or would they all fall under the registered company,

    Thank you in advance for your help,
    Kind regards
    Richard

    • Hi Richard,

      All companies registered in Ireland require a Registered Office address. There is no way around this. However, there are many solicitors and accountants (like ourselves) who offer a Registered Office address facility for a set annual fee. The Companies Registration Office and the Revenue Commissioners issue their correspondence to the Registered Office address of a company.

      When registering the company with the Revenue Commissioners they will ask for the company’s place of business. It is highly unlikely that the Revenue will register the company for taxes (including VAT) if the company does not have a place of business. The Registered Office address and the place of business address can be the same or different addresses. However, the Revenue will question in detail a place of business address that is already linked to a solicitor or accountant. This point is important as you do not want to register a company and then find that the Revenue Commissioners will not register the company for VAT.

      A limited company can register many trading names. A Form RBN1B is required to be submitted to the Companies Registration Office to register a business name (trading name) for the company. A certificate is then issued for the trading name. All trading names and the name of the limited company are then required to be displayed on the letterhead of the company along with some other details. All the business names will fall under the one VAT number as all the business names belong to one company.

      All monies received through the businesses should be entered in one “pot” as it all belongs to one company. But it might be help full to have a bank account for each business to help on keeping track of expenses and cash-flow. Good bookkeeping is essential when there are several businesses running through one company to maintain a good standard of cash flow and to establish which businesses are profitable etc. Bookkeeping is definitely an area that must be correct from the beginning to keep accounting costs etc. down for the business.

      If you have any queries in relation to the foregoing or indeed require any assistance in setting up your business feel free to contact us on 021 4310266.

      Kind regards,

      David.

  8. Hello

    I am currently looking at starting my own website which will have it’s own unique branding, I am concerned that if I do not set up a limited company my brand will not have any protection from competitors. However I am not in a position to set up a ltd company because I do not have a second director, would it be best for me to go down the self employed route? Or is there another way round the multiple director setup?

    Many thanks,
    Gary

    • Hi Gary,

      At present, all Irish Limited companies require a minimum of two Directors. This is due to change once the new Companies Bill is fully enacted. However, this will not happen until at least the middle of 2014.

      In relation to protecting your brand you could look into registering your business as a trademark. The patents office will assist you in relation to establishing if your brand/product is eligible to be trademarked. This may be the best way forward for you as a sole trader.

      Regards,

      Maria

  9. Hi,
    what do you mean by: “Note that there is no restriction on registering a duplicate business name. However, a company name must be unique.”
    Does that mean even if I register a business name as a sole trader someone can use the same name as e.g. a limited?

    Many Thanks
    Ben

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  11. Im registred as a sole trader this year i hade my first costumer and i send him a invoice with email and he will pay straight in my account . But now im thinking how will i give this man a receipt? I do have an duplicate receipt book but i think it schould be used only for cash and checks could i send in an email withot signature? Or maybe invoice is all i need to give if he pays by bank transfer? Tnx

  12. Hi Seamus,

    I intend on setting up practice as a Psychologist. It will just be myself providing the service, and I will not be hiring anyone else/going into partnership. As there is no large capital expenditures required for assets/stock etc., I assume that establishing myself as a sole trader is more suitable and beneficial than setting up a Limited Company.

    Could you kindly offer your opinion?

    Thanks and kind regards.

    • Leeanne,

      This decision depends on many variables but setting up as a sole trader and reviewing it later might be a good option.

      Seamus

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