Deciding on a Company Structure: Sole Trader vs Limited Company

Congratulations, you have a business idea that you wish to proceed with.

The next step is to understand how to structure your business.   In Ireland, there are two options for entrepreneurs – Sole Trader. Limited Company. 

 

Option 1.  Sole Trader

Sole Trader is the easiest option to structure your business.             

Register yourself with the Revenue Commissioners as a Sole Trader and file income tax returns every year before the end of October.  The advantages of this option are that it is quite easy to maintain the books and there is no requirement for an audit.  This greatly reduces your accounting fees.

You must also register your business name with the CRO.  Just remember to display the business name certificate at your business location.  You will also need to provide the bank with a copy to open a bank account for your business.  Your business/trading name need not be original, but the company name must always be unique.

Option 2.  Limited Company

Limited Company refers to a legal entity, which is different from you as an individual.  Your liability

as a shareholder in a Limited Company corresponds to the number of shares that you own.  When setting up a Limited Company is that you will need two directors.  Apart from yourself you will need a second director, although you own all the shares, and your company is essentially a one-person firm.  The person you appoint as a second director must be fully aware of his or her responsibilities and liabilities, particularly because, as directors of a limited company, they are subject to a lot of regulations.

In return, you get several benefits in terms of taxation.  For instance, if your business is highly profitable, then a tax of 12.5% is levied on the company, compared to a personal tax of 20% to 41% which would have been otherwise levied had you employed the Sole Trader structure for your business.

Statutory accounts need to be submitted along with the Corporation Tax returns as well as the Annual Return to the Companies Registration Office, every year.  Usually, it is not required for small companies to have their accounts audited.  However, there are companies that need an audit.

They include:

• Companies that have filed their annual return late in the current or previous year to the CRO.

• Companies with an annual turnover (Sales) of more than €8.8 million, with assets exceeding €4.4 million.

• The average number of employees is more than 50

• Companies that are limited by guarantee – this may include sports clubs, libraries.

• Group companies (Parent / subsidiary)

• Banking or insurance companies

• Unlimited companies

A company structure does result in more accounting and tax work but there are tax savings gained from making use of a company structure for your business.  

Closing a company can often be more difficult than it is for those employing a Sole Trader structure, particularly if the company has debts to pay.

Where things may go wrong:

1. The directors of the company should not withdraw money from the bank accounts belonging to the company for their personal use.  If they do so, this would be a serious violation.  They may only be paid in form of dividends, salaries, or various reimbursements, whether for travel or vehicle expenses or towards the payment of any loan they may have made to the company.  It’s important to be extremely careful when withdrawing money from the company’s bank accounts.  To be safe, consult a tax expert before doing so.  Visit the website www.odce.ie for more information

2. It is very important that Directors file their income tax as failure to do so is a criminal offence.  Even if the only income a Director derives is his or her salary from the company, then it is compulsory to submit an income tax return.

Other items to be considered when deciding on a legal structure:

• Will the business be profitable enough to justify the expenses of running the company?

• Who will handle all the paper work? 

• Are you aware that your company accounts will be a matter of public records at the CRO?

IMPORTANT:  This is a simplified example of the difference between a sole trader and a limited company and does not constitute advice.  Please consult a professional accountant for advice as every case needs to be reviewed on its own merits.

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