SOLE TRADER or LIMITED COMPANY; Which is Right for You?

Any person setting up a business needs to consider whether to operate as a limited company or as a sole trader. A limited company provides the protection of Limited Liability for the owner, which is the main reason why so many businesses operate as a limited company, whereas a sole trader is personally responsible for the debts of the business.
The owner will normally become a director of the limited company. There are obligations on directors of companies to operate within company law and consequences for failure to comply, and therefore a person accepting the position of director needs to ensure that their company remains compliant. There is a requirement for the director to ensure that the person appointed as company secretary has the skills or resources necessary for the role. Any person forming a company should ensure that they take professional advice
The Companies Act, 2014 simplified the format of limited companies in Ireland and companies can now benefit from the following where they operate a standard limited company:
• The company can be set up with only one director
• If only one director is in place, the secretary must be a different person
• The form of constitution is simplified, replacing the complex Memorandum and Articles of Association that existed heretofore
• There is no requirement for the company to hold an Annual General Meeting (AGM).
Tax Reasons to Incorporate
• Cash flow of tax payment
• Lower corporation tax rate, i.e. 12.5%
• Start-up tax exemption-
• Termination payments- Attractive relief to enable extraction of funds on retirement in a tax efficient manner.- Tax-free lump sum based on number of years’ service and average remuneration.
• Travel and subsistence expenses- Payments made in line with Revenue guidelines are allowable.- – Motor expenses qualify and a tax deduction can be claimed for business element. Generally, a sole trader can’t claim subsistence expenses.
• Pensions- Company pension scheme is a very good opportunity to maximise future benefits.- – No cap on amount of contribution by company for employees once pension isn’t overfunded. Company can get a deduction for tax purposes for contribution made to a pension scheme.
• Income tax- Lower USC rate for owners of a company with PAYE income over €100,000.- – PAYE system spreads income tax payments over the year. There is a possible difference in the level of employer’s PRSI
Tax Reasons not to Incorporate
• Surcharge on undistributed non-trading income held by companies – where a close company fails to distribute income within 18 months of its year end, it is subject to a 20% surcharge depending on the income.
• Participator loan rules – amounts loaned to directors are subject to income tax payable by the company and a benefit-in-kind arises on the individual where the loan is at a preferential rate. • CGT double charge – applicable were there are assets in a company.
• High burden and cost of administrative duties such as CRO filings, audits, corporation tax returns etc.
• When a company is incorporated, the accounts are public. If you are a sole trader, you have privacy as to the level of income received for the year.
• A scheme has been in place to encourage long-term unemployed people to start their own business. Under the scheme, an exemption from income tax up to a maximum of €40,000 per annum is provided for a period of two years for individuals who set up a qualifying unincorporated business. The scheme applies to businesses set up between 25th October 2013 and 31st December 2018
Any person forming a company should ensure that they take professional advice.
Source; Brokers Ireland