Sole Trader Vs Limited Company
David Branigan has 15 years experience in practice and is accredited by the ACCA.
In the second of a series of Blogs for www.startups.ie David discusses the pro’s and con’s of setting up as a Sole Trader vs Limited Company
Setting up a new business can be a very exciting adventure and it is easy to get carried away by the early rush to make the sale and get the contract. But it is important your business structure suits your needs to avoid costly restructuring later.
Three types of business can be used each with its advantages and dis-advantages.
Setting up as a sole trader is simplicity itself. In many ways you can just open a bank account and away you go. There is no legal red tape to cut through or expansive legislation to deal with. Consequently the annual cost required to run a sole trader business is relatively cheap compared to other types of business of similar size.
However there are some major pitfalls. Firstly you have unlimited liability for all the debts of the business. This is not only to trade creditors but also to customers who would want to sue you as a result of a faulty products or service.
There are also tax issues to consider. A sole trader is taxable on the actual profits of the business and not just on the funds you withdraw. This can result in paying tax even if no money has been withdrawn from the business. There are also reduced options in relation to pension entitlements, the use of civil service millage rates and other issues.
Setting up a limited company costs perhaps €500 between the registration and other professional fees. Once set up, a limited company is classified in law as a separate legal entity from its owners or shareholders. This effectively means in most circumstances, the shareholders of a limited company have limited liability from all the debts of the company.
Limited companies in general also tend to give a better impression of an established business.The owners of a limited company can be easily identified and some record of the performance of the company is usually publicly available from the Companies Registration Office. This does give a level of comfort to anyone who may wish to deal with the company.
However all companies are subject to extensive Company Legislation which imposes significant responsibilities on how the company is run. Banks often ask for personal guarantees before giving loans which effectively gets around the company’s limited liability status.
Accountancy costs are higher as a company’s accounts generally require significantly more disclosure then a sole trader’s. In some cases a statutory audit of a company is required which will further increase the costs.
There are many tax advantages to a company. For example, money not withdrawn in the form of wages, is subject to corporation tax currently at 12.5%. There is also incentive schemes where new start up companies are exempt from corporation tax and very large tax savings for corporate pension schemes.
Forming a partnership is popular amongst those who are precluded from forming limited companies.
Partnerships can be very messy and it is vital that a partnership agreement is set up from the start so that each partner knows what is expected of them in terms of capital contributed and profit share.
The most significant problem with partnerships is that each member is jointly and separately liable for the debts of the partnership. This means that if one partner runs up any debts, the other partners are all liable for them. For this reason I always recommend that partnerships are avoided at all costs for this reason. A limited company is almost always the better option.
If you are happy to remain a small business and you are not particularly worried by the thought of unlimited liability, then I would recommend operating as a sole trader initially. It is always possible to incorporate at a later stage and the benefits of a limited company may not measure up to the costs.
When you have been trading for a while and you find yourself earning more money then you need to live on, you may then need to consider whether the savings as a limited company will outweigh the costs.
If you need any further advise and information about any of the above do get in touch with us at firstname.lastname@example.org