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17 August 2015

Starting a Business – Sole Trader or Limited Company?

Posted By: AIB Business
Starting a Business – Sole Trader or Limited Company?

Starting up a new business is an exciting time but it can also be a very stressful experience. Whilst mistakes will happen, there are some key decisions that are important to get right from day one.

One of these centres around whether you should set up as a sole trader or limited company, writes Andrew Lambe of Company Bureau Formations Limited.

 

A common dilemma faced by budding entrepreneurs is choosing the legal structure that they should set up as: a Sole Trader (Partnership if there are two or more people involved) or a limited company. The main difference is that a sole trader is legally and financially tied to their business in that the business / sole trader is legally the same entity / person. A limited company is a separate legal entity from the person(s) involved (directors and shareholders) and is governed by a legal document called a Constitution (Memorandum & Articles of Association) as well as the Companies Act 2014. The Director(s) manages the company on behalf of the owner(s) / shareholder(s) although they are commonly the same person(s).

A number of factors can help you decide which option is best for your business – many of which are illustrated in the following table:

 

Sole Trader / Partnership

Limited Company

Set-up Costs

Minimal. €20 to register a business name. A form TR1 should also be filed with Revenue.

Registering a limited company through an agent will cost around €300. A form TR2 should be filed with Revenue.

Liability for Debts

Unlimited liability – business owner is personally liable for the debts of the business.

As the company is a separate legal entity, Limited liability protects the directors / shareholders.

Taxation

Same as individual. All profits are taxable, under Income Tax rules (20%-40%), regardless of whether they are taken out as salary or not.

Slightly more favourable than sole trader. Profits can be taxable at 12.5%. Only remuneration taken from the company by the Director(s) is subject to Income Tax. Seed capital relief available.

Annual Fees

Accounting fees of €500-€1,000 per year.

Accounting fees from about €1,500 per year. This increases if the company requires an audit.

Name of Business

No protection of name unless trademarked.

Protection given to limited company name.

Annual Requirements

Income tax return, VAT returns (if applicable).

Directors’ income tax return plus Corporation Tax return and CRO annual return and accounts. VAT returns (if applicable).

Allowable Expenses

All costs must be fully receipted e.g. motor costs, travel etc.

Directors’ expenses reimbursed by company through vouched expense forms with receipts.

Disclosure of Accounts

Public does not get to see accounts as they are filed with Revenue.

Public can access “abridged” accounts if they pay a small fee with CRO.

Access to Funds

Very difficult. Personal loan from bank may be required.

Limited company status can be looked upon more favourably by banks as well as customers and suppliers. Shares can be issued to investors in return for venture capital if required.

Pensions / Wealth Creation

Same as individual. Can pay into pension but tax relief on pension contributions is restricted, according to age and upper relief limit.

Much more favourable than sole trader. Pre-tax company profits can be diverted into executive pension for director, virtually tax free.

Succession of Business

Business ceases on death of owner.

Better than sole trader for succession planning. Shares can be passed / sold on so business does not cease.

Closing the Business

Revenue and CRO notified. The individual can do this.

Revenue notified and Voluntary Strike-off necessary, which costs around €300. Professional support may be required.

 

 

The decision may or may not be easy for you. For example, a business that aims to have a turnover of €100,000 in year one, needs strong credibility and, where limited liability is important, would be best served as a limited company. For someone selling cakes at a weekly food market with a turnover of €8,000 per year, a sole trader would be most appropriate. It is important to note that you can start out as a sole trader and change to a limited company later if required.

If you are still unsure which option is right for you, then the best advice we can give you is to talk to an accountant or tax advisor. A good accountant will evaluate your business in detail and give you a professional recommendation based on the key factors.

Congratulations once again on taking the brave step to start your own business, and we wish you every success with your new venture!

Written by: Andrew Lambe, Commercial Director of Company Bureau Formations Limited – Ireland’s leading company formation, company secretarial and corporate service provider.

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