Sole Trader or Starting a Company?

After much deliberation, you’ve decided to open your own company. What kind of structure will it have?

An important consideration when setting up a shop in Ireland is choosing whether to operate as a sole trader (or as part of a partnership) or to incorporate as a limited liability company (LLC). This guide will help determine whether you should choose one or the other.

Business Types

If you run a business as a sole proprietor, you will be legally entwined with it. If the business incurs any debts, you will be responsible for them. Because of this, you could be held legally accountable for covering any of the company’s financial obligations.

On the other hand, a director or shareholder of a private company is subject to unlimited liability. If you only paid for the shares you own, your financial responsibility ends there.

Sole proprietorships, on the other hand, can be set up without incurring any costs from the Companies Registration Office (CRO). Additionally, closing down the business is a simple and inexpensive process. A sole proprietorship does not necessitate the filing of an employment tax return (provided it is only you who works for the firm). Furthermore, you are exempt from submitting tax returns to the CRO.

When forming a limited company, you’ll have to deal with a lot more red tape. There are, however, numerous advantages. Limited companies are more likely to secure financing from banks and other lenders than sole proprietorships, and directors can take advantage of generous pension tax breaks and a lower corporation tax rate than sole proprietors are charged.

Pros and Cons of a Private Limited Company

Pros:

• Limited liability. As a result, shareholders’ liability is limited to the price of their shares. The debts of the corporation are not the responsibility of the shareholders.
• Unlike sole proprietorships, limited companies are governed by their own board of directors and shareholders.
• Directors receive generous tax breaks on pensions.
• Limited companies are viewed more favorably than their non-limited counterparts in terms of bank credit.
• Generally, corporations pay corporation tax, which is more favorable.
• Shares can be transferred or sold in the event of the death of a director, allowing the business to continue.

Cons:

• Regulations governing bureaucracy and compliance are more stringent for corporations than for sole proprietors or partnerships; you will need to get an accountant.
• Directors must register and file P30s and P35s at an additional cost because they are employees.
• Starting and maintaining a business is more expensive.
• Closing the business is costly as well.
• For a small fee, the general public can view certain types of filings, such as summaries of financial statements.
• When it comes to health and safety concerns, limited liability is not applicable.
• Even if a business name is registered, it is not immune from being used by others.
• Trademark registration is required for your own protection.

Pros and Cons of a Sole Partnership

Pros:

• This type of business is very cost-effective and simple to run.
• The cost of shutting down the company is minimal.
• The CRO does not require a sole trader or partnership to open an account.
• A sole proprietorship does not necessitate the filing of any paperwork on behalf of the employee it employs.
• There is no way for the general public to see what’s going on in accounts.

Cons:

• Personal liability for the business’s debts has no cap.
• Instead of paying corporate tax, profit is taxed at the individual level.
• Only a limited number of pension tax breaks are available.
• Sole traders and partnerships may not be able to hire individual contractors because they are only allowed to work with limited companies.
• Not as likely to get financing from banks and other lenders as corporations with limited liability.
• When the business owner passes away, the company is effectively shut down.

Deciding on a Legal Structure for Your Business

All of this is dependent on how you envision your company growing, who will be involved, and who you expect to be your most important customers. The decision isn’t as simple as it first appears to be. And don’t forget that operating as a sole proprietorship isn’t necessarily a sign that you’re aiming too low.

A sole trader, for example, may be better than a limited company if you are planning to start a micro-business in your home with few or no creditors and are unlikely to incur any third-party costs.

A limited company, on the other hand, maybe a better option for those who need to raise additional funds for their business, or for those who anticipate borrowing large sums of money from banks or other lenders in order to get their business off the ground.

However, before making a decision, be sure to weigh all of the relevant factors. As a sole proprietor, remember that you can later switch to a limited company. If you’re still unsure, consult with a tax professional or look at the CRO company registration section.

Don’t Forget About Taxes!

Your business must be registered for tax purposes. The Revenue Online Service is flexible enough to meet the needs of any business, regardless of its size or structure. Check out the Revenue Commissioner’s tax registration guide for more information.