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Sole Trader Vs Limited Company Ireland

sole trader

If you’re starting your own business, you have likely wondered whether it’s better to register as a sole trader vs limited company in Ireland. This is probably one of the first decisions you will need to make, so it’s essential to understand the differences between the two and how they relate to your specific circumstances.

Having a sole trader vs limited company structure can affect your income tax, your cash flow, how you file your annual tax returns, and your personal finances, too. So what is exactly the difference between the two, and what should you expect of each? Let’s take a look.

Sole Trader Vs Limited Company Ireland
DefinitionAn individual who owns and runs their own business.A separate legal entity from its owners.
LiabilityUnlimited liability. The owner is personally liable for any debts.Limited liability. Owners are only liable up to the amount they paid for shares.
TaxPay tax on business profits through the self-assessment system.Pay corporation tax on profits.
ControlComplete control over the business.Control is shared among shareholders.
AdministrationLess paperwork and regulatory requirements.More regulatory requirements and paperwork.
PerceptionMay be perceived as less professional.May be perceived as more professional and credible.
PrivacyBusiness finances are not separate from personal finances.Business finances are separate from personal finances and are publicly available.

What Is A Limited Company?

Having a Limited Company means that all your business is run through a private organisation. The company is a legal entity; all its accounts are kept separate from your finances and personal assets.

A Limited Company (or LTD), sometimes called a “Private Company Limited by Shares“, is one of the most common structures in Ireland. One of the main advantages of having one is that, as a Director of a Limited Company, you can pay yourself both a salary and dividends. Also, if something happens to your business (for example, if it incurs debt or loss), you are not personally responsible. Limited Companies are separate legal entities, meaning they can take their own loans, be sued, and enter contracts independently of you.

Of course, registering a Limited Company can have disadvantages for small businesses, too. In general, companies and the company directors face more compliance requirements than those expected of a sole trader business and come with more legal obligations.

How to Register Your Limited Company in Ireland

Having a Limited Company means that all your business is run through a private organisation. The company is a legal entity; all its accounts are kept separate from your finances and personal assets.

A Limited Company (or LTD), sometimes called a “Private Company Limited by Shares“, is one of the most common structures in Ireland. One of the main advantages of having one is that, as a Director of a Limited Company, you can pay yourself both a salary and dividends. Also, if something happens to your business (for example, if it incurs debt or loss), you are not personally responsible. Limited Companies are separate legal entities, meaning they can take their own loans, be sued, and enter contracts independently of you.

Of course, registering a Limited Company can have disadvantages for small businesses, too. In general, companies and the company directors face more compliance requirements than those expected of a sole trader business and come with more legal obligations.

Advantages Of A Private Limited Company

There are several advantages to running your business as a limited company. For instance:

  • Tax Efficiency: As a sole trader your profit is taxed at the income tax marginal rates. This means that any sole trader profits earned greater than €36,800 (single person) per annum are taxed at the higher marginal tax rate (effectively 52% PAYE + USC + PRSI). As a sole trader you will also incur preliminary tax liabilities whereby you need to pay next year’s income tax bill this year. This can often result in large lump sum tax bills which negatively impact cash flow. Usually, if your sole trader business is generating profits greater than €36,800 per annum it is worth considering whether incorporation will help you manage your business tax bills. Remember, the corporation tax rate on limited company profits remains 12.5% for now. 
  • Pensions: The pension tax breaks available to you as a company director of a limited company are greater than that of a sole trader business. Sole trader pension contributions are subject to limits. Firstly there are age-related pension limits e.g. 30-39 years 20%, 40-49 years 25% etc. Secondly, there are earning limits. As a company director you can effectively top-up into a pension scheme equal to 100% of your annual salary. This means if your salary was €50,000 annually you could top-up €50,000 into an executive pension scheme and reduce your corporation tax exposure. At Around Finance we prepare financial statements so that we might conduct a pre-year-end review with you. We then offer professional advice and recommendations with regard to pension top-ups before the year-end. 
  • Limited Liability: All shareholders of a Limited Company have limited liability if something happens to the business. This is one of the main differences between sole trader vs limited company Ireland. For example, if you incur debts or losses, you are not personally liable for the total amount but only for what you have invested. There are exceptions to limited liability. Typically a bank will require a personal guarantee from the directors on business bank loans. Usually all other trading debts are captured within the limited liability of the company vehicle including Revenue tax bills such as Vat and Paye. This is an important consideration if you are a new business owner with personal assets e.g. a family home. 
  • Investment:  A Limited Company is usually required if you intend to seek investment from private investors. The mechanism for which you raise capital will be one whereby you issue equity/ownership in your Limited company. Also, some forms of government funding will require a Limited liability company be operational. E.g. Enterprise Ireland Innovation Vouchers.

How To Register A Limited Company In Ireland

Setting up your first Limited Company in Ireland can initially seem a little confusing. It’s important to remember that registering a company comes with particular legal obligations and monetary costs. There are simple steps you can take to ensure you are following the process correctly as it is more complex when comparing sole trader vs limited company Ireland. These include:

How to Register as a Sole Trader in Ireland

Although the requirements for registering as a Sole Trader in Ireland are less demanding than those of a Limited Company, you still need to provide some vital documentation. In this case, our recommended steps below also include the things we advise you to do before you officially register your business.

  • Make sure you have at least one director: The first thing you will need to register a Limited Company in Ireland is a director. This person will be responsible for managing the company on behalf of all shareholders. You are free to change directors once your company is set up and growing. Still, at the time of registering your Limited Company, they need to be resident of an EEA country (or purchase a non-EEA resident bond, for example, if your director is from the UK).
  • Pick a secretary: Your Limited Company also requires a secretary. If you have more than one director, one of them can be the secretary as well. This person’s primary duty will be to file Annual Returns and work with the accountant to ensure all financial statements are delivered on time. Many new Limited Companies outsource their secretary to a corporate body. 
  • Have at least one shareholder and decide how many you will release: Remember that shareholders are the owners of your Limited Company. You need at least one of them, but don’t worry: it can also be the director or secretary! You don’t need to specify any agreements beforehand, but you always should plan your share division (these can be aspirational to be issued in the future or actually allocated) to determine the legal ownership of your company.
  • Register an address and name: You will need to specify your Limited Company’s office/business address and company name. The address has to be physical and located in Ireland. Your name must be unique, distinguishable from other registered ones, and must follow specific guidelines (for example, it cannot be offensive, abusive, or illegal).
  • Sign the incorporation paperwork: The last step of registering a Limited Company in Ireland is to prepare and sign your incorporation documents. These documents are submitted to the Company Registration Office (CRO).  And you’re done! 
limited company ireland

What Is A Sole Trader?

Starting a business as a Sole Trader is like setting up shop under your own name. This is the simplest way to get started, but it also means you’re personally responsible for any business debts. This is a key point to consider when comparing a sole trader vs limited company.

Registering as a sole trader vs limited company Ireland is pretty straightforward. You just send a TR1 form to the Revenue Commissioners, letting them know when you started trading and if you’re using a different trading name. A handy tip for Sole Traders is to register your business with the Company Registration Office (CRO) for a small fee of €20. This can help with things like securing a .ie domain name and can serve as proof of trading when applying for grant support.

As a Sole Trader, your business earnings are taxed at your personal rates. So, if you make more than €36,800 as a single person, or €73,600 as a married couple, you’ll be taxed at the higher rate of 52%. This is a crucial aspect to consider when weighing up a sole trader vs limited company, as it can significantly impact your overall household income tax.

The money you make as a Sole Trader is all yours after taxes. If you were a Limited Company, you’d have to take money out through payroll, which could mean more taxes. Some people prefer the simplicity of paying their taxes upfront as a Sole Trader, so they can take home their business profits directly.

In terms of paperwork, as a Sole Trader, you only need to file an income tax return. Limited Companies, on the other hand, have to prepare additional financial returns that are publicly available. This usually means lower accounting costs for Sole Traders.

Starting as a Sole Trader can be a great choice for new businesses. It’s straightforward, and in the early stages, you probably won’t have big profits or liabilities. However, as your business grows and profits increase, you might want to consider transitioning to a Limited Company. Just remember, once you become a Limited Company, you have to keep up with compliance, and closing down the company can involve extra costs. This is another important factor to consider when comparing a sole trader vs limited company.

Advantages of Being a Sole Trader

  • Simplicity: The process of registering as a Sole Trader is very straightforward by submitting a TR1 to the Revenue Commissioners. Also registering a business name with the CRO is relatively straight-forward and cheap €20. 
  • Less legal filings: As a Sole Trader, you don’t need to prepare financial statements for submission to the CRO. You don’t need to worry about your obligations as a company director or late filing deadlines, or pay hefty fines for non-compliance and audits.
  • More privacy: When you register as a Sole Trader, you are not required to disclose your information to the public. Things like your address and your earnings are kept private, always. 

There are many advantages to registering as a sole trader vs limited company Ireland. For example:

sole trader

How to Register as a Sole Trader in Ireland

Although the requirements for registering as a sole trader vs limited company in Ireland are less demanding, you still need to provide some vital documentation. In this case, our recommended steps below also include the things we advise you to do before you officially register your business. You should:

  1. Start with a business plan: It’s always a good idea to write down what you expect your business to achieve and how you want to grow it. This type of document will also come in handy if you’re going to apply for government startup support or get a business loan.
  2. Anticipate your income and tax: As a Sole Trader, your income is subject to up to 52% tax. The good news is, however, that you can deduct all your business-related expenses. To do this more effectively, it’s better to have a rough idea of your income and salary so you can calculate which tax bracket you will fall into.
  3. Make sure you have your PPSN number: A PPSN or Personal Public Service Number is a unique reference number you use in Ireland to access public services, social welfare benefits, and information. If you live here, you probably already have one, but if you’re moving to the country, you might need to apply for a PPSN before moving on to the next step. As a sole trader your PPSN number becomes your business tax number and your vat number should you become vat registered.
  4. Register for Income Tax: Before enlisting as a Sole Trader, you will need to register for Income Tax. You can do this through Revenue’s eRegistration services or using the TR1 Tax Registration Form. Your Tax Reference Number is usually the same as your PPSN.
  5. Register for ROS: Once you’re tax registered, it’s time to register for the Revenue’s Online System, or ROS. You will later use this site to see your current tax position, file tax returns, and pay bills.
  6. Register your business name with CRO (if you have one): The last step to becoming a Sole Trader is to register your business name with the Companies Registration Office, or CRO. If you use your name for your business, you don’t need to follow this step.

Sole Trader vs Limited Company – Which One is Better?

Limited Companies and Sole Traders are the two most common business structures in Ireland. However, it can be tough to understand which one is better for you if you’re just starting your business.

The main differences between sole trader vs limited company in Ireland are the following:

As a Sole Trader, you are personally liable for your business. A Limited Company, on the other hand, is a separate entity (of which you can be a director). This means you are more protected against liability.

Registering as a Sole Trader is very straightforward. All you need to do is submit your name and type of activities. Getting approved as a Limited Company is not as easy – you will need to provide more documentation and make more decisions such as appointing a secretary, having a business address, and deciding how you will release your shares.

Your income as a Sole Trader can be taxed up to 52% – and that applies to everything you earn (minus your business expenses). If you have a Limited Company, you can plan your salary and structure your finances using pension top-up’s so you can better manage your tax exposure. 

Limited Companies require you to keep track of corporate filings and deadlines. Plus, the public has access to your financial accounts, and you might have to pay significant fines if you don’t comply with specific requirements. However, the company remains a separate legal entity.

As a Sole Trader, there is no legal difference between you and your business. Your personal assets can, for example, be used to settle debts, and all your earnings are taxed as income. On the other hand, registering as a Sole Trader is much easier, you need fewer annual legal fillings, and you don’t have to prepare regular financial statements. You also have more privacy because your financial details are not available to the public.

sole trader

Benefits Of Being A Limited Company Vs Sole Trader

  • Limited Liability: As a limited company, your personal assets are protected if the company runs into financial difficulties. This is because a limited company is a separate legal entity. On the other hand, as a sole trader, you have unlimited liability, which means your personal assets could be at risk if your business can’t pay its debts.
  • Tax Efficiency: Limited companies often have more tax-efficient ways to operate. The corporation tax is lower than the income tax rates that sole traders have to pay. Also, limited companies can pay dividends to shareholders, which may be taxed at a lower rate than income. In contrast, sole traders are taxed on all their business profits, which can lead to higher tax bills. Don’t underestimate the benefits of effective tax planning.
  • Professional Image: Operating as a limited company can give your business a more professional image, which can be beneficial when dealing with larger clients or customers. Sole traders may not have the same level of perceived professionalism, which could impact their ability to attract certain clients.
  • Raising Capital: Limited companies can raise money by selling shares in the company, which can be a significant advantage if you’re looking to grow your business. Sole traders, however, cannot sell shares and may find it harder to raise capital.
  • Pension Opportunities: Directors of limited companies have more flexible and tax-efficient pension options. Sole traders have fewer pension options and may find it harder to save efficiently for retirement

Is A Sole Trader Better Than a Limited Company?

Starting as a Sole Trader business in Ireland can be a good choice for new operators, especially if you’re not expecting significant profits or liabilities at first. As your business grows and profits increase, you might want to consider setting up an Irish Limited Company. Just remember, once you set up a Limited Company, you’ll need to keep up with compliance and will face additional costs if you decide to wind down the company.

How To Choose The Right Business Structure

Choosing the right business structure is a critical decision that can significantly impact your business’s success. Here are some factors to consider when deciding between sole trader vs limited company in Ireland:

  • Level of Personal Liability: As a sole trader, you are personally liable for the business’s debts. This means your personal assets, such as your house and car, can be used to pay your creditors. On the other hand, a limited company is a separate legal entity, which means your personal assets are generally protected if the company cannot pay its debts.
  • Setup Time and Costs: Setting up as a sole trader is generally quicker and less expensive than setting up a limited company. However, the process of registering a company can provide more benefits in the long run, such as limited liability and potential tax advantages.
  • Tax Implications: Sole traders are liable to income tax on all their business profits, which can lead to higher tax bills. Limited companies pay corporation tax on their profits, which can be lower than the income tax rates that sole traders have to pay. Also, limited companies can pay dividends to shareholders, which may be taxed at a lower rate than income.
  • Administrative and Reporting Requirements: Limited companies have more administrative and reporting requirements than sole traders. This includes filing annual returns and financial statements, which can be time-consuming and require professional help.
  • Growth Prospects: If you have plans to grow your business, a limited company may be a better option. Limited companies can raise money by selling shares in the company, which can be a significant advantage if you’re looking to grow your business.
  • Risk Tolerance: If you’re working in an industry with a higher risk of getting sued for damages due to error, setting up a limited company might be your safest bet.
  • Professional Image: For businesses selling professional services, having a limited company can give your business a more established image. It is also not uncommon for larger corporations to deal only with limited companies.

How Around Finance Can Help You

Not sure how to choose between a sole trader vs limited company? We are experts in accounting for small and new businesses. Our business advisors can help you decide which business structure is best for you and guide you on all the steps of the registration process. Our job is to make yours as pain-free as possible, so contact us today to see how we can be of assistance!

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