When you decide to start a business, one of the first questions you have to ask is which is better, sole trader or limited company?
You now have to decide on a structure for your business and decide if you are going to trade as a sole trader (or partnership) or as a limited company.
Both structures have advantages and disadvantages as you will read here.
Which structure you choose depends on how you see your business developing in the short and long term.
Other fundamental questions which need to be asked are who will be involved in this business and who your clients might be?
From our experience, we know that the choice is not as straightforward as it might seem. For some people starting out in a business, operating as a sole trader can make them feel like they are setting their sights too low while for others, the hassle of setting up a limited company isn’t worth it.
Every case is different and it might make more sense in certain business types such as a micro-business operating from home to operate as a sole trader. If the intention of the business is to set up and expand rapidly, then setting up a limited company may be more appropriate.
What does Sole Trader Mean?
A sole trader means that you are not legally separable from the business that you run for any of the debts that the business incurs. This means that you can be held legally responsible for the company’s debts.
What Does Limited Company Mean?
You have set your business up as a company in which you are a shareholder with limited liability. This means that the liability of shareholders is restricted to the amount paid for shares. In a limited company, shareholders are not be held personally liable for company debts. You and the company are legally separate entities.
Many businesses will set up as a sole trader to begin with and can then be incorporated as a limited company as time goes on and profits increase. See out guide to setting up a Limited company in Ireland here.
They choose this particular route because setting up as a sole trader is far easier with no charges from the Companies Registration Office (CRO). If the business fails quickly, it is also easier to wind down than a company. A sole trader doesn’t have to file returns to the CRO either.
Some businesses will set up as a limited company immediately because there are plenty of benefits to doing that also, most especially the limit of liability and companies tend to find it easier to deal with banks and lending institutions than sole traders.
The Benefits of Being a Limited Company
- Limited liability. This means that the financial liability of shareholders is restricted to the amount paid for shares in the company (usually a nominal value).
- A limited company is a separate legal entity from you as a director and shareholder.
- There are some generous tax incentives for directors on their pensions.
- Limited companies tend to find it easier to access bank credit due to its perceived more permanent nature.
- The company is taxed at the more favourable corporation tax rate.
- If a director dies, shares can be passed on or sold to others, so the business does not have to cease.
Disadvantages of Limited Company
- There is a lot more bureaucracy and compliance rules for limited companies than there are for sole traders or partnerships.
- Directors of a company are employees and must file P30s and P35 forms at an extra cost.
- It is more costly to open and run a limited company
- It is more expensive to wind down a limited company.
- Your business is now public and friends or enemies can see you summary accounts for a small fee.
- Limited liability does not apply to health and safety matters so added insurance will be needed to ensure cover.
- Others can operate under the same name even if you have registered that business name.
Benefits for Being A Sole Trader or Partnership
- It is the most cost-effective way of setting up a business.
- There is only a small cost to wind up the business.
- The sole trader or partnership does not have to register accounts with the CRO.
- A sole trader does not need to register as an employer if they alone work in the business.
- Public does not get to access accounts.
Disadvantages Of Being A Sole Trader Or Partnership
- There is no limit on personal liability for the debts of the business.
- Profit is taxed at individual rates, instead of corporation tax rate.
- Limited scope to avail of pension tax breaks.
- Individual contractors may not be able to work with sole trader/partnership, as they are restricted to working with limited companies.
- Business ceases with the death of the owner.
As you can see each type of business structures has many advantages and disadvantages and weighing up each of these options is critical. Remember you can set up as a sole trader when you are starting out and then change to a limited company at a later date.
How to Set Up As A Sole Trader
In Ireland, setting up in business as a sole trader is straightforward. All you have to do is go here How to register for tax as a sole trader (revenue.ie). It is important to make sure your business has insurance in the event of any issues arising from you product or service.
How to Set Up As A Company Director
Setting up a limited company is more complex. You need to choose a company name, decide on the ownership and share structure, choose shareholders, get a company address and choose a company secretary.
They are just the basics. If you require more information, you can find it Companies Registration Office Ireland (CRO) along with your incorporation paperwork. The name is placed on a register and protected from use by other businesses.
Key Points To Remember
If you are starting out life as a sole trader or a limited company there are some good habits you should develop around every key business decision you should make.
- Spend a lot of time researching the differences between operating as a sole trader and as a limited company. This can be the difference between earning an income and having a business.
- Always get professionally qualified advice on setting up the legal or financial structures of your business. It can save a lot of heartache down the road.
- Register for Tax regardless of which structure you choose. Again better to find out the pitfalls early than later on when it can be far more costly.
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