When setting up in business, it can be difficult to know the best structure to use. Should you be a sole trader or company director?
Maybe you have heard friends and family saying categorically that one is better than the other, but it all depends on the type of business you run and level of liability you are willing to accept.
Each option has its own distinct advantages and drawbacks, with tax, funding options, administrative procedures, and flexibility of operations all being relevant.
To get a better idea of which might be the right choice for you and your business, here are some of the main factors to consider.
Setting up procedures
Setting up in business as a sole trader is the most straightforward option. You simply need to register as self-employed with Revenue and take out any necessary forms of business insurance. It’s worth bearing in mind, however, that your business name is not protected as a sole trader.
Setting up a limited company is a little more complex. You need to choose a company name, which is registered at Companies Registration Office Ireland (CRO) along with your incorporation paperwork. The name is placed on a register and protected from use by other businesses.
As a sole trader, you take out ‘drawings’ from your business that are taxed as income. In general, the income level of a sole trader will be comparatively lower than that of a company director, who has the opportunity to extract money via dividend payments at a lower rate of tax.
Company directors are also often employees of their company and as such, take a monthly salary via the Pay As You Earn (PAYE) system.
A proportion of your remuneration as a director will also be made up of dividend payments, which do not attract as much tax.
Therefore, it can be more lucrative to be a company director than operate as a sole trader – but with that comes specific legal duties and responsibility.
Ongoing administrative responsibilities
Your main responsibility as a sole trader is to complete your annual self-assessment tax return. If you reach the VAT threshold, you’ll need to register for VAT. And it’s also advisable to keep your personal finances separate from those of your business.
Apart from these requirements, there are very few specific administrative responsibilities when you’re a sole trader.
As a limited company director, you’ll have a range of fiduciary and statutory duties and obligations.
These include submitting an annual corporation tax return, company accounts, VAT returns if applicable, and an annual return which provides details for the public record about the company and its directors.
You pay income tax on taxable profits via the self-assessment tax system, plus PRSI (Pay Related Social Insurance) and USC (Universal Social Charge).
There aren’t as many tax deductible costs and allowances available to you when compared with limited company directors, and you’re unable to defer your profits to future years.
Limited companies pay corporation tax on profits over a certain level and benefit from a range of tax reliefs, allowances and tax-deductible expenses.
Corporate tax affairs are more complex and many company directors choose to hire an accountant to ensure their Revenue obligations are met.
You are personally liable for all the debts of your business, which could result in the loss of personal assets if the business becomes financially unstable. You can be sued personally as a sole trader, which is why it’s important to take out business-related insurances such as professional indemnity and employer’s liability if appropriate.
The company is viewed as a separate legal entity, so your personal liability is limited to the amount you’ve invested in the company.
You must meet the statutory and fiduciary duties required of the office, though, otherwise there is a chance the ‘veil of incorporation’ will be lifted.
In general terms, funding can be more difficult to obtain as a sole trader, as banks and other ‘traditional’ institutions tend to favour the relative security of dealing with a limited company. This could potentially limit your opportunities to grow the business.
You’re able to borrow money from your own company, with certain limitations. If the loan is not repaid within nine months of the accounting year end, it will be treated as a taxable benefit (interest-free loan).
Editor’s note: This post was originally published in February 2017 and has been updated for accuracy and relevance.