Question: What company structure is best for you?
To be able to answer this question, we first need to understand what sole trader and limited companies are.
A sole trader is an individual in business who is personally responsible for the debts and liabilities of that business.
| Advantages | Disadvantages |
|---|---|
| 1.Quick and easy to set up; | 1.No protection for your personal assets should the business fail and you become unable to pay your creditors; |
| 2.No requirement to file annual accounts or returns with the Companies Registration Office | 2.Profits are taxed at your marginal rate of tax |
A limited company is a private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.
| Advantages | Disadvantages |
|---|---|
| 1.If the company becomes unable to pay its debt, your personal assets are protected; | 1.Increased legal responsibilities for directors; |
| 2.Low rates of corporate taxation; | 2.Requirement to file annual return and annual accounts with the Companies Registration Office; |
| 3.Increased scope for tax planning, particularly in terms of pension contributions | 3.More paperwork and cost involved in setting up and closing down the business |
Now that we have a better understanding of the two structures, let’s get back to our question: which of the two structures is more suitable for you?
The answer depends on numerous factors such as your type of business, whether you’re still going to be in other employment, likelihood of success, projected turnover, whether you have investors now or in future, whether you want to put profits into a pension, etc.
Let’s take a closer look at the differences between the two structures:
| Sole Trader | Limited Company | |
|---|---|---|
| Costs associated with structure | Cheap | Expensive |
| Accounting Fees | Cheap | Expensive |
| Annual filing Fees | n/a | CRO fee |
| Annual Tax Returns | Form 11 Return to Revenue(income tax return) | CT1 return (Corporation Tax) and B1 to CRO Form 11 returns for directors |
| Tax rates | Similar to PAYE but you lose your PAYE tax credit | Corporation tax rate 12.5.Director’s salary at PAYE levels with no PAYE tax credit |
| PRSI Rates | 4% with a minimum of €500 | No PRSI on company profits, PRSI on directors pay at 4% |
| Employer | If it is just yourself then there is no need to register as an employer | Directors are employees so you must register and file P30 / P35s etc. |
| Liability for debts | Unlimited | Limited to the company only |
| Cessation | Simple to cease business | Expensive to cease business with CRO |
| Disclosure of Accounts | Public does not get to see accounts as they are only filed with Revenue | Public can access summary accounts if the pay small fee with CRO |
To conclude, it is easy to start business as a sole trader and transfer into a limited company at a later stage. It is a more time consuming and costly process to commence as a limited company and to later change to a sole trader.
The best thing you can do is to talk to an Accountant or Tax Advisor. They will evaluate your business and give you the pros and cons for your type of business. If we can help you regarding this matter, please don’t hesitate to contact us.