If you’re an entrepreneur looking to start a business in Ireland, you may be unsure as to whether it’s better to be a sole trader or operate as a limited company. In this blog, we’ll look at some of the key differences between these two options and the advantages and disadvantages of each one.
If You’re Unsure if You Should Be a Sole Trader or Limited Company, Here Are the Main Advantages and Disadvantages of Each:
A sole trader is someone who is operates on their own account, without incorporating their business. This means that they have all the personal liability for their debts and liabilities, whereas with a limited company there are shareholders who have some degree of protection from personal liability.
In terms of tax, both types of business need to file an annual tax return but are exempt from paying corporation tax (CT). Sole traders can deduct expenses directly from their revenue to arrive at what is known as your taxable profit.
Taxes payable will then be based on your taxable profit. With a limited company that doesn’t trade, these profits may not be subject to CT but will still require an annual return being filed with Revenue Commissioners Ireland (RCI).
However in this case too any losses incurred by such companies can’t be offset against other income sources meaning there would be no savings on your overall tax bill. There is also a special process for paying yourself from a company.
A Sole Trader Is an Individual Carrying on a Trade, Profession or Business
A sole trader is an individual carrying on a trade, profession or business.
A sole trader is not taxed as a company. This means the profits of your business are taxed at your marginal rate up to 40%.
If you are planning on selling products online, then it might be worth setting up as a limited company so that you can benefit from tax reliefs such as SME status and capital allowances.
Before you decide, it’s important that you fully understand what both options mean for your business.
If you are a sole trader and want to become an employer of one or more people, then you will need to re-register as a limited company and become an employer. You should also consider whether the services provided by your business fall within any of the professions regulated by statute or legislation in Ireland. This is important because there may be certain restrictions on those who wish to register as a sole trader under such legislation.
A Sole Trader Pays Tax Once a Year After the End of the Accounting Period, Which Is Usually 12 Months
A sole trader pays tax once a year after the end of the accounting period, which is usually 12 months. The amount of tax payable depends on your profits, and this can vary from year to year.
A Limited Company Is a Distinct Legal Entity, Separate From Its Directors and Shareholders
You should know that a limited company is a distinct legal entity, separate from its directors and shareholders.
There’s quite a lot of confusion around this point, so it might help to understand the difference between “limited” and “sole trader”. A sole trader is an individual (you) who trades as themselves in their own name and on their own behalf.
This means that if you trade as a sole trader, then your business will be your personal property, which means that it can be seized by creditors or sold off by the courts if they order someone to do so in order to settle debts owed by you personally (i.e., not related to your business).
On the other hand, when you set up a limited company for yourself (or through which you do business), then this creates an independent legal entity: the limited company itself has its own identity separate from any one individual who owns shares in it or works within it.
Company Accounts Must Be Prepared Annually and Filed With the Companies Registration Office (CRO)
The annual accounts of your company must be prepared and filed with the Companies Registration Office (CRO).
The accounts should be prepared by an authorised accountant or a firm of accountants, and audited by an auditor. The filing date for the annual accounts is 14 days after your company’s AGM.
