Sole Trader vs Limited Company in Ireland: What You Need to Know

When starting a business in Ireland, you have two options: operate as a sole trader or register as a limited company. However, it’s essential to choose carefully.

That's why we talked to our company formation experts. We've put together a clear guide about the critical business factors you need to be aware of when choosing the right way to set up your business according to your plans.

We'll walk you through the following:

• Advantages and Disadvantages of Sole Trader vs Limited Company

• Advantages of Sole Trader

• Disadvantages of Sole Trader

• Advantages of Limited Company

• Disadvantages of Limited Company

• The differences Between a Sole Trader and a Limited Company in Ireland

• Choosing Between a Limited Company and Sole Trader

• Choosing a Business Structure in Ireland

Comparison Table: Sole Trader vs Limited Company in Ireland

Aspect

Sole Trader

Limited Company

Simplicity

Setting up is straightforward and inexpensive.

More complex setup and higher costs.

Compliance

Fewer requirements.

More obligations and annual returns.

Privacy

Earnings and financial details are private.

Filed accounts are publicly accessible.

Liability

Unlimited personal liability.

Limited liability for shareholders.

Tax Rate

Personal income tax rates (up to 52%).

Lower corporate tax rate (12.5%).

Tax Planning

Limited options.

More opportunities for tax planning.

Access to Credit

May face challenges.

Better access to credit and funding.

Credibility

Lesser credibility with customers and suppliers.

Often viewed with more credibility.

Separate Legal Entity

Not a separate legal entity.

A distinct entity from directors/shareholders.

Costs

Lower costs for opening and closing.

Higher setup and closing costs.

Employer Registration

Not required.

Need to register as an employer.

Other notes

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Directors can take tax breaks on pensions.

Advantages and Disadvantages of Sole Trader vs Limited Company

Advantages of Sole Trader

• Simplicity: Setting up as a sole trader is straightforward and inexpensive. There are no charges from the Companies Registration Office (CRO), and it is easy to wind down the business if needed.
• Minimal compliance: Sole traders have fewer compliance requirements compared to limited companies. They do not need to file annual returns with the CRO.
• Privacy: As a sole trader, your earnings and financial details are not publicly accessible.
• Lower costs: Sole traders have lower costs for opening and closing the business than limited companies.

Disadvantages of Sole Trader

• Unlimited liability: As a sole trader, you are personally liable for all the business debts. Your personal assets can be used to settle business debts.
• Higher tax rates: Profit earned as a sole trader is taxed at personal income tax rates, which can be as high as 52%. (This contrasts limited companies, which are subject to a lower corporation tax rate of 12.5%.)
• Limited scope for tax planning: Sole traders have limited options for tax planning compared to directors of limited companies.
• Limited access to credit: If you’re a sole trader, banks may be less than enthusiastic about extending a line of credit, as opposed to when you run a limited company.

Advantages of Limited Company

• Limited liability: One of the main advantages of a limited company is limited liability. The liability of shareholders is limited to the amount paid for shares, protecting your personal assets in case of any business risks or challenges.
• Lower corporate tax rates: In Ireland, limited companies benefit from a lower corporation tax rate of 12.5%.
• Separate legal entity: A limited company is separate from its directors and shareholders.
• Credibility: Limited companies often have more credibility in the eyes of customers and suppliers, which can be useful when applying for financing, bidding for tenders or signing contracts.
• Tax benefits for directors: Directors of limited companies can take advantage of tax breaks on company pensions.

Disadvantages of Limited Company

• Compliance requirements: Limited companies have more compliance obligations compared to sole traders. They must file annual returns with the CRO and adhere to stricter rules and regulations.
• Higher costs: Opening and closing a limited company can be more expensive than operating as a sole trader.
• Less privacy: Limited companies must file accounts with the CRO, which are publicly accessible for a fee.
• Registration as an employer: Limited companies need to register as employers, which is an additional dose of red tape.

The Differences Between a Sole Trader and a Limited Company in Ireland

The main differences between sole traders and limited companies in Ireland can be categorised into legal structure, liability, tax, and compliance. In particular…

• Legal structure: A limited company is a separate legal entity from its directors and shareholders, while a sole trader is not.
• Liability: Sole traders have unlimited liability, meaning your personal assets can be used to settle business debts. Limited companies offer limited liability, protecting personal assets.
• Tax: Sole traders are taxed at personal income tax rates, while limited companies are subject to corporation tax rates (which are typically much lower; at 12.5% in Ireland).
• Compliance: Limited companies have more compliance requirements, such as filing annual returns with the CRO, compared to sole traders.

Choosing Between Incorporating as a Limited Company and Sole Trader

Choosing between a limited company and a sole trader structure depends on several factors. Instead of jumping into the first option that sounds good, consider the following:

Firstly, do you plan to have a high turnover? If so, you might prefer to establish a limited company.

Then, consider your growth plans. If you plan to run your business for a while and expand it significantly, it’ll be much easier to scale with a limited company. And if you plan to use external financing for the scale-up, know that it’ll be easier to get a loan or investor funding if you run a limited company.

On the more personal side, sole traders are personally responsible for their business debts. If you’re in a seasonal or unpredictable industry, this means your assets are “on the hook” for any debts incurred by your business. In a way, you and your business are a single – not separate entity, unlike limited companies.

Your compliance responsibilities differ, as well. Sole proprietors don’t have to handle as much red tape as limited companies do, but it comes at the expense of tax planning. Put simply: limited companies get more opportunities to ensure their taxes are optimised, as opposed to sole traders.

However, don’t make a snap judgement. Instead, consult a licensed professional who can guide you on the right path. Get in touch with our experienced team at Outmin and select the best option for your business in Ireland!

How to Choose a Business Structure for Venture in Ireland

Consider the following factors when making preliminary decisions on whether to open a limited company or start doing business as a sole trader:

• Type of business: Evaluate the nature of your business and the industry you operate in to determine which structure aligns best with your goals and needs. For example, startups which plan to look for funding down the line should typically incorporate as a limited company (at least to start with), so they can easily access venture capital. In contrast, it’s harder to get funding as a sole trader.
• Personal liability: Consider your comfort level with personal liability for business debts. If you want to protect your personal assets, choose a limited company.
• Tax implications: Consider the potential tax savings, benefits, and obligations associated with being a sole trader or a limited company. For example, if you plan to be a one-(wo)man band, it’s easier for you to be a sole trader. However, if you plan to have multiple employees and scale your business, a limited company is a much better option in the long term.
• Long-term plans: Speaking of your long-term options, consider your goals. Do you plan to expand? You’ll get much more flexibility with a limited company.
• Access to funding: Consider the potential need for funding or investment in your business because limited companies have an advantage in accessing credit or attracting investors.
• Compliance requirements: Limited companies generally have more compliance requirements than sole traders, so make sure you understand the exact compliance levels you’d be dealing with before making the decision.

At Outmin, we specialise in assisting businesses in making informed decisions about their tax obligations. Our accountants and tax advisors can provide expert guidance tailored to your needs. Reach out today to discuss your options and ensure you choose the perfect business structure for your venture in Ireland!