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So you’ve finally decided to start your own business, or maybe you’ve taken over the family farm. How will you structure your business? Will you form a company or will you be a sole trader? What’s the difference?
Alex Hoffman of Pierse McCarthy Lucey takes a look at the pros and cons of running a business though a company…
While there are many advantages and disadvantages of both, the main differences between operating a business as a limited company and operating as a sole trader are in the areas of taxation, liability and bureaucracy.
Taxation
With the upper band of Ireland’s personal tax rate still stubbornly high at close to 52% (when you include USC and PRSI), the corporation tax rate of 12.5% continues to be the main reason why a business owner might chose to operate through a company.
In recent years many dairy farmers, as well as larger tillage and dry stock farmers, have seen incorporation as an attractive means of minimising their tax liabilities and developing the business, by leaving profits in the farm company to be used to fund investment in items such as buildings, stock or machinery.
The same rationale applies to any business, particularly those in expansion mode.
It can also suit situations where a person might be fortunate enough to have a separate source of income or financial support and can therefore avoid or minimise the withdrawal of funds from the business, which would otherwise be subjected to income tax.
There are also more favorable tax breaks available for company directors wishing to make contributions to their pensions compared to those available for sole traders.
Liability
As a sole trader you will be legally inseparable from your business.
This means that you will be personally liable for the debts of your business and your creditors will be fully entitled to pursue you in the event of your business running into difficulties and them being left unpaid.
This means that your personal assets, such as your house and car, could potentially be used to pay your creditors.
A Limited Company however is a separate legal entity. This means that even if your business is forced to close down, any outstanding creditors of your business can only claim against the assets of your company (unless you are found to have traded fraudulently or negligently).
This can be a major factor for a variety of businesses, including manufacturing where product liability could be an issue, or where there may be a question over the availability of reliable and affordable insurance cover.
Bureaucracy
While limited companies may enjoy the advantages of favourable tax treatment and limited liability, there is significantly more bureaucratic red tape to cut through when setting up and operating a limited company.
To set up as a sole trader, you will need to register with the Revenue Commissioners and submit an income tax return once a year.
The books are generally easier to maintain and don’t have to be audited. As a result accountancy fees should be lower than for a company. Closing down the business is also relatively straightforward.
Setting up as a Limited Company however can be more expensive and time-consuming in terms of the paperwork to be filed with the Companies Registration Office (CRO) to form the company and the registrations to be made with the Revenue Commissioners once the company has been set up.
Limited Companies are also obliged to file their annual returns and accounts with the CRO (which can be viewed by members of the public on payment of a nominal fee), which Sole Traders are not required to do.
Closing down a company is also more difficult and expensive than it is for a sole trader, especially where there are outstanding debts and a liquidator is appointed.
Business owners also need to be mindful that money in the company’s bank accounts are not their personal funds and care needs to be taken to ensure that any money which is withdrawn for their own benefit, whether by way of salary, dividend, reimbursement for motor and travel expenses or repayment of a loan given to the company, is treated correctly from a tax and company law perspective.
A company structure therefore requires more input from accounting, legal and tax advisors but the additional fees involved should be more than covered by the tax savings in running the business through a company.
Other factors to consider
• Limited companies tend to be looked upon more favourably when it comes to accessing bank credit.
• In the event of a shareholder’s death, shares can be passed on or sold, so the business does not have to cease.
• A limited company also provides a structure for introducing additional investors, giving shares to key employees or family members and selling shares in the business.
— The material contained in this article is for general information purposes only and does not constitute legal or other professional advice.
No liability whatsoever is accepted by Pierse McCarthy Lucey for any action taken in reliance on the information contained in this article.
