If you are planning to start your own business you are probably wondering about the best legal form. Is it a sole trader or a private limited company?
Both legal forms have advantages and drawbacks and the choice will depend on your individual situation and future business strategies.
The most important differences
- If you are trading as a self-employed your company and you are one body in legal, accounting and tax terms. A private limited company is a legal entity separate from its directors.
- A sole trader has unlimited responsibility for business debts which may be paid from his personal assets. In a limited company the liability is restricted to the amount of the capital invested.
- As a sole trader you are taxed on all your income, including PAYE and trading income. It means that in many cases you will pay the income tax at a higher rate of 40%. A limited company can benefit from a low corporation tax rate of 12.5%.
- A limited company has more reporting obligations as opposed to a sole trader. You will need a professional accountant to look after the preparation of financial statements and annual returns.
- The accountancy costs may be slightly higher for limited companies, depending on the annual turnover and the number of monthly transactions. The number of employees and directors will also have impact on the level of accounting fees.
- The process of setting up a limited company is longer to some extent and more expensive comparing to starting as a sole trader. However, the benefits of trading as a limited company definitely compensate for a higher cost and more complex set up procedure.
Limited company is a separate legal entity as opposed to a sole trader.
What legal form should you choose?
The choice of the legal form will always depend on your individual situation and many factors have to be taken into account.
The major aspect would be the risk you are willing to take when running your business. You have to be aware that as a sole trader your liability will be much greater comparing to a limited company and your personal assets may be in danger.
If you are not based in Ireland you will not be able to register as a sole trader. The other trading option available to you would be a limited company. In this case directors do not have to be based in Ireland.
Trading as a limited company gives more business credibility. It may be easier for the company to obtain finance and to enter into business relationships with other traders. Limited companies are seen as more reliable and trustworthy.
The decision to incorporate will also depend on your previous trading history. It makes sense to make the transition from a sole trader to a limited company once your trading income is stable and you have an established clients base. This gives a greater chance of success for your new company.
Trading as a limited company gives more business credibility.
What do you need to do to start a business?
The process of starting a business is not as complicated as it sounds. Obviously, it is much easier to start as a sole trader but setting up a limited company is also a relatively quick process.
There are also other implications of starting a business. You will need to register for income or corporation tax and if you employ people you will also have to register as an employer with the Revenue Office. An obligation to register for VAT will depend on your circumstances and we will advise you on the best course of action.
Once your business is set up you will need to open a business bank account. There are many attractive offers on the market and the process of opening a bank account is quite straightforward. We will give you some advice on what needs to be done here.
Not sure what choice is best for you?
During our initial consultation we can explain the options available to you and highlight benefits and drawbacks – all FREE of charge! We will be delighted to help you.
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