Sole Trader and Limited Company are two of the most common business structures in Ireland. If you’re just starting out, or even if you’ve been in business for a while, you may be wondering what is the best option for you.
Below we look at some of the considerations, but this is not exhaustive and every situation is unique. You should seek professional advice before making a final decision.
What is the difference between Sole Trader and Limited Company?
One of the biggest differences is that Sole Traders are personally liable to the debts of the business. Personal assets, such as your house and car, can potentially be used to pay your creditors.
On the other hand, Limited Companies are separate legal entities. This means that your potential creditors can only claim against the assets of your company.
Initially, setting up as a Limited Company can be more expensive and can be slightly more time-consuming. But there is also more security around your personal assets, it can provide more credibility in your industry and there are more tax incentives.
There is certainly less legal ‘red tape’ when operating as Sole Trader in Ireland but there are limitations on how much you can grow as a self-employed person. Many of our clients have started their businesses as Sole Traders and then converted to a Limited Company as their needs dictated, so this is an option too.
Pros and cons of each structure
Sole Trader earnings
Everything a Sole Trader earns is considered to be income and anything used for personal reasons is called “drawings”.
Tax on earnings is paid to the Revenue Commissioners (Revenue) and Sole Traders must prepare an annual income tax return, a Form 11. The deadline for the income tax return is the 31st of October after the end of the financial year, or mid-November if filed and paid through Revenue’s Online System (ROS).
For example, earnings (i.e. net profit) over €70,000 per year could be liable to pay 52% tax as well as Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) Sole Traders are also required to pay Preliminary Tax at the end of the financial year which can be a shock id it’s unanticipated.
It’s also good to note that drawings are not the same as employee’s wages as they cannot be deducted as an expense.
Limited Company profit and directors’ salaries
In most small companies the owners/founders are the shareholders and directors.
Profits of a limited company are taxed at the standard Corporation Tax rate of 12.5%.
Profits are calculated after deduction of, amongst other things, payment of salaries, bonuses, fees and pension contributions to or on behalf of directors. These payments are subject to PAYE, PRSI, USC which the company must deduct and pay to Revenue as it would for any employee.
Payments made to shareholders from the profits of the company are called dividends. The company must pay 20% withholding tax to Revenue which the individual shareholder can offset against their personal tax liability on their personal tax return.
Talking to your accountant is a great way to decide how to pay yourself in the most tax-efficient way. Your accountant can give you advice for future-planning and how to cut down your tax bill at the end of the year.
These are some of the factors to consider but there are many more and your personal as well as business circumstances will have a big influence. You should seek professional advice.
DHKN offers advice on business structures, taxation, accounting and corporate finance. Please contact me directly at dhickey@dhkn.ie to arrange a free confidential chat with our experts.
