Sole trader or limited company: How to choose the right option

More and more people are finding themselves in a position where they want to start their own business. Being made redundant or not being able to find a new job are two reasons why people choose this as an option.

For a lot of people, the rewards of running your own business can far out way the “security” of being in paid employment.

But it isn’t easy. There are many issues to understand and hurdles to overcome with setting up your own business.

As well as getting a grasp of the tax system in Ireland, managing cash flow, and trying to be an expert in IT, HR, marketing and accounting, you will also have the choice at some stage of whether you should operate as a sole trader or a limited company.

In this article, I have outlined the differences between the two to help you to decide which option might be best for your business.

Set-up cost

Sole trader: Free to set up with Revenue Commissioners. If you need to register a business name, you can do this via the Companies Registration Office (CRO) there’s a cost associated with this: €20 if done electronically and €40 if done via a paper application.

Limited company: Your business needs to be set up with the CRO. It costs €50 to set up electronically and €100 to do so via a paper application. Note: for PLC businesses, it costs €300 (by paper only).

Annual returns

Sole trader: Form 11 Return to Revenue (income tax return).

Limited company: CT1 return (Corporation Tax) and B1 to CRO. Form 11 returns for directors too.

Tax rates

Sole trader: Similar to PAYE but you lose your PAYE tax credit.

Limited company: Corporation tax rate 12.5%. Director’s salary at PAYE levels with no PAYE tax credit.

Taxable expenses

Sole trader: All costs must be fully receipted, for example motor costs and travel.

Limited company: Director’s claims for travel, accommodation and subsistence completed through vouched expense claims. This is tax free to the director.

Employer

Sole trader: If it is just yourself then there is no need to register as an employer.

Limited company: Directors are employees so you must register and file P30s and P35s etc.

Liability for debts

Sole trader: Unlimited – your personal assets can be liable.

Limited company: Limited to the company only.

Succession of business

Sole trader: The business ceases with the death of owner.

Limited company: Shares can be passed or sold on so business does not cease.

Cessation

Sole trader: It’s simple to cease a business and free with Revenue.

Limited company: It’s expensive to cease business with CRO.

Disclosure of accounts

Sole trader: The public does not get to see accounts as they are filed with Revenue.

Limited company: Members of the public can access summary accounts if they pay small fee to the CRO.

Access to funds

Sole trader: It can be difficult to access funding.

Limited company: Limited company status can be looked upon favourably by banks.

Final thoughts on setting up as a sole trader or limited company 

The sole trader route is the cheapest route but it may not be the best option for you. Having limited access to funding, for example, might be a key consideration for you.

However, if it’s suitable, you could take the sole trader route initially and then when it makes more sense, you could go down the path of forming a limited company.

Editor’s note: This post was originally published in April 2012 and has been updated for accuracy and relevance.