Starting a business in Ireland: Sole trader or limited company?

Starting a business in Ireland: Sole trader or limited company?
Larissa Feeney
Larissa FeeneyAccountant Online

Posted: Fri 13th Oct 2023

When setting up a business in Ireland, you’ll first need to decide on your business structure. The two most common structures in Ireland are sole traders and limited companies.

Setting up a limited company in Ireland can involve more paperwork and be more time-consuming than setting up as a sole trader. However, many of my clients choose to go down the limited company route because it offers additional benefits.

In this blog, I'll discuss the differences, advantages and disadvantages of both structures to help you decide which is the best option for you.

Pros and cons of setting up as a sole trader

In some ways, setting up as a sole trader can be beneficial. For example:

  • A sole trader is simple to set up and shut down once you have a PPS number and a Revenue Online Services (ROS) account/MyAccount.

  • There are fewer legal filings for a sole trader than for a limited company.

  • You'll have more privacy as a sole trader than a company since details about your business aren't publicly listed.

  • As a sole trader, you don't have to prepare financial statements.

However, there are disadvantages to setting up as a sole trader. For example:

  • You're personally liable for paying your business's debts and your personal assets can be used to settle any debts your business has.

  • You need to prepare a tax return every year.

  • You might have to register a business name with the Companies Registration Office (CRO).

  • All your earnings (minus expenses) are taxed as income.

  • Setting up as a sole trader instead of a limited company can make you less credible in the eyes of suppliers and clients.

Pros and cons of setting up as a limited company

Setting up a limited company in Ireland also has advantages. For example:

  • They have limited liability, which means the private assets of a company director are usually protected from being used to settle company debts.

  • Companies in Ireland pay a low rate of corporation tax compared to businesses in other European countries.

  • Setting up as a limited company can make your business seem more established in the eyes of clients and suppliers.

  • A company director can take advantage of more tax reliefs and benefits than a sole trader.

  • Directors of limited companies have more options to pay themselves than sole traders. They can take a salary or dividend from their company.

  • You may be more likely to get approved for credit options or government support as a limited company.

However, before you decide to set up a company in Ireland, consider the following:

  • Setting up a limited company is a longer and more expensive process.

  • There are more corporate filings involved.

  • The public has access to the financial accounts of limited companies.

  • Directors have fiduciary duties. This means they have a legal obligation to act in the company's best interests.

  • If you sell shares in your company, it can dilute your level of ownership.

Taking money out of the business

As mentioned above, there are differences in how sole traders and directors of limited companies take money from their business.

Sole trader earnings

Everything you earn as a sole trader will be treated as income. You must pay tax on your earnings to Revenue using a Form 11.

Sole traders must also pay preliminary tax, which is a combination of the income tax, PRSI and USC you expect to pay for the year. Generally, you must pay this by 31 October every year or usually mid-November if you file and pay your taxes online.

If you're unsure how to calculate your preliminary tax, an accountant can help you.

Directors' payment options

As a director of a company, you have a few options for paying yourself:

  • Salary: This is a fixed payment made at regular intervals – for example, once a month. Your salary will be taxed in the same way as an employee's.

    Your company will collect income tax, USC and PRSI and pay it to Revenue. However, it's good to note that salaries are deducted as an expense from your company's earnings, which will lower its overall tax bill.

  • Dividends: These are payments a company makes to shareholders from its after-tax profits.

  • Pension: Companies can make employer pension contributions on behalf of their directors.

Taxes for sole traders versus limited companies

Sole traders in Ireland pay tax on all their earnings, minus expenses. Depending on how much you earn, you could end up paying as much as 55% tax. On the other hand, Irish limited companies pay corporation tax of 12.5% on earnings, minus expenses.

Both sole traders and limited companies may need to register for value added tax (VAT) if they meet the criteria set out by Revenue.

If a sole trader or a limited company hires staff, they must register as an employer with Revenue and pay employers' PAYE tax.

Keeping to the law: Sole traders versus limited companies

Whether you start a business in Ireland as a sole trader or a limited company, you must pay tax on earnings, minus expenses (income tax for sole traders and corporation tax for limited companies), as well as VAT, employers' taxes, and relevant contracts tax (RCT) (if this applies).

Limited companies have the extra requirement of having to prepare financial statements and file annual returns with the CRO each year.

Whether you're a sole trader or a limited company, an accountant can take care of your legal obligations. If you're a non-financial manager or business owner, you may not have the skillset or time to take care of this, so you should consider whether it's worth outsourcing.

Accounting fees for limited companies are usually higher than for sole traders because of the additional filing requirements. But having an accountant can give you peace of mind that your business is complying fully with statutory deadlines.

Is it better to be a sole trader or a limited company in Ireland?

You should consider all the advantages and disadvantages of each structure before deciding. Consider your attitude towards risk when it comes to your personal assets, and think about what the law says you must do in relation to tax and other obligations.

If your budget and resources are limited, you can consider setting up as a sole trader to begin with, and then changing to a limited company in the future when your business grows.

Relevant resources

Larissa Feeney
Larissa FeeneyAccountant Online

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