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How Do I Switch From a Sole Trader/Partnership to a Limited Company?
When starting out in business, many entrepreneurs choose to operate initially as a Sole Trader (or Partnership if there is more than 1 person involved) as opposed to forming a Limited Company. It is cheap and relatively easy to set up a sole trader business - all you need to do is register a business name with the Companies Registration Office (CRO) and register with Revenue as being self-employed.
However, many Sole Traders or Partnerships who operate successful businesses find that they don’t have the same advantages as a Limited Company. For example, when operating as a Sole Trader, an individual is personally liable for the full debts of the business (or 50% liable in the case of a Partnership) and should the business fail, personal assets could be at risk to pay off creditors.
There are many benefits to operating as a Limited Company, such as the low corporate tax rate in Ireland of 12.5%, but the main advantage is having limited liability as alluded to above. Should the business become insolvent, the owners (shareholders) are only liable to pay any amount unpaid for their shares. A Limited Company will also give them more rights over their company name and can appear to be more prestigious and serious when dealing with banks, customer, suppliers, etc.
Another key benefit are the generous allowances that a profitable company can contribute to an Executive Pension on behalf of the Director/s. Sole Traders are capped in terms of what they can contribute tax free (e.g. persons aged 30-39 cannot pay more than 20% of their earnings into a pension), however the Company can contribute on behalf of the directors as much as they like tax-free up to a pot limit of €2 million.
The Companies Act 2014 recently updated the standard Private Limited Company into a more modern corporate entity (The LTD company for short) which can now have just one director and can trade whatever type of business the director/s deem appropriate (once legal of course), without the need of having to update the Company Constitution.
OK so how do I proceed with a Limited Company?
For successful businesses with a turnover exceeding €60,000, a limited company will generally be the best option, although professional advice from an Accountant is worthwhile as this turnover figure would be a very rough guide.
The process of switching from a Sole trader to a Limited liability company is relatively straightforward. First, you need to choose a company name and the appropriate limited company type. By far the most popular company type for commercial business ventures in Ireland is a Private Company Limited by Shares (LTD), which we mentioned earlier. You should file a cessation of business name form with the CRO to cancel your business name registration. You may wish to re-register the same business name you were previously trading as, however the rules on limited company names are a lot more stringent and your first choice may not be available.
Most people will incorporate a limited company through their Accountant, Solicitor or a licenced Company Formation Agent. This is the quickest and most efficient way of ensuring that the process is done correctly. A limited company can be incorporated in 3-4 working days, and you will receive all the legal documents including the Certificate of Incorporation, Company Constitution and Company Seal.
Once the limited company is registered, you need to pick a date that you cease operating as a sole trader. The following day can then be the day that you re-commence trading under the limited company. It is advisable to contact the Revenue to advise them of this and you will need to register the new limited company for taxes. Most companies will register for Corporation Tax, VAT and PAYE. It is important to note that a new bank account is required as the limited company is now a separate legal entity from your previous business and this can take a couple of weeks.
Congratulations on your business venture and we wish you continued success in the future! For assistance with any of the above including registering your limited company, please don’t hesitate to pay us a visit on www.companyformations.ie.
This article was written by Andrew Lambe of the Company Bureau.
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