What is a sole trader?
A sole trader is an independent business owner who manages and runs their own business under their own tax number. Since you as a person and the business are one and the same, any losses the business experiences are your personal responsibility as a sole trader. Likewise, after paying taxes on the profits, you keep everything.
Individuals who operate their own businesses as sole traders are personally accountable for keeping accurate records of their business financial transactions. This includes filing an annual self-assessment tax return and, if your revenues exceed the VAT threshold, registering for VAT and filing VAT returns.
What is a limited company?
A limited company has its own legal identity. As a result, it is a completely separate entity. The owners of the business are called shareholders and their liability is limited to the investment they made. (Therefore, “limited”)
The majority of limited companies operate on a “shares” basis. When a company is divided into shares, each share has a specific monetary value. The shareholders are then given these shares in turn for the capital invested.
This implies that shareholders’ liability is limited to the price of their shares therefore the shareholders of a limited company are not personally liable for the debts of the business in general (shareholders may have to sign personal guarantees when dealing with banks).
Advantages of a Limited Company in Ireland
Limited liability – Less Risk
You are not held personally liable for the debts of the company. Your personal assets are protected. Unlike a sole trader who is held personally liable for the debts of the company.As a sole trader if you default on your debts your personal assets such as your home can be sold. If this is a significant advantage really depends on the nature of your business. If you are only supplying your labour then it’s unlikely you’ll have debts. If however you’re buying goods on credit to sell later then it is likely you will have more of a risk.
Expenses
You can expense your salary unlike a sole trader which takes the full residual profit as a salary. Also, if you travel a lot employees (including directors) are allowed to claim civil servants rates. In some cases these can be higher or lower than actual expenses depending on your circumstances. These rates are not available to sole traders. Also, as an employee, if you work from home you can claim the e-worker / home worker allowable expense of €3.20 per day.
Tax efficient – More funds to reinvest
If you operate as a sole trader all of your profits are taxed at the PAYE tax rates of 20-40%. In general, most trading companies are taxed at 12.5%. If you have a limited company you will have more funds available to reinvest in comparison to a sole trader. If you are a new company you can be exempt from paying tax on your profits for the first 3 years of existence. There are a number of conditions, the biggest being you can not transition what was previously your job into a company.
Access to Start-up Funding
Some startup funds require you to have a limited company. If you are a sole trader you can not apply for certain grants.
More Clients
If you work as a contractor some potential clients will not work with individuals. This is mostly due to the fact they don’t want you classified as an employee. As a result of this most contractors work through a limited company in Ireland.
Year Startup Tax Exemption
If you setup a company in Ireland you may be exempt from paying corporation tax for up to 3 years. There are a number of conditions set out on Revenue’s website. The main one being you cannot claim relief if you are transferring an existing trade to a company. Also, your corporation tax must be less than €40,000. If your corporation tax is less than €60,000 partial relief may apply.
Disadvantages of a Limited Company in Ireland
Cost
The setup costs and the annual costs are much higher than a sole trader as mentioned above. To set up a company costs €250-€300 + VAT and the annual accounting fees can be €1,000 -€1,500 per year. A sole trader has no setup costs, you simply register for income tax with Revenue. A self-employed tax return costs €250 – €350.
Penalties
As a company you are required to submit a set of accounts to the CRO If you fail to comply you will be subject to penalties. Also, you will lose your audit exemption which will result in far higher accounting fees.
Privacy
As a limited company you have much less privacy. The accounts you submit to the CRO can be viewed by anyone for a cost of less than €15. Within those accounts a directors salary will also be disclosed.
Losses Unlike with a sole trader you cannot offset your personal income. For example, as a sole trader you can offset your self-employed expenses against your PAYE income A company is unable to do this.
