Choosing The Most Suitable Structure For Your Business Needs.
DBASS Blog | July 2021
After taking the initial decision to start a new business it is now time to decide if you should set-up as a sole trader or as a limited company.
Whilst the main benefit is that of limited liability there are other important factors which need to be considered.
You can always change from sole trader to a company and vice versa at a later stage but there would be tax implications to consider.
As a sole trader, if your business is not successful, your personal assets can be taken and used to pay any creditors or debts owed from a legal action. Your house or car for example are exposed to the debts of the business. There are risks in every business and the Covid-19 pandemic has certainly illustrated this and in so many different sectors of business.
As a limited company your personal assets are not exposed and only the assets owned by the company can be taken and used to pay any creditors or debts owed, but this is provided that you have not signed any personal guarantees for the company – for example on company bank borrowings or lease agreements.
A further consideration is the level of exposure for your business. It is advisable to consider how well your business is insured in terms of possible accidents, potential loss of earnings, potential claims by employees etc.
The End Goal – Succession Planning
The end goal for you and your business may determine which structure to choose.
If the business makes a profit and you wish to extract all of this from the business for personal use then a sole trader set-up may be the structure for you.
A limited company structure allows you to build up assets in the company if you do not need to extract all the profits for personal use.
If you want to sell your business in the future or pass it onto your children, a limited company will give you many options in this regard. There are significant tax implications and reliefs as a limited company when it comes to selling or passing on your business.
In high risk industries there are other potential risks to be considered and should be discussed with your accountant directly.
As a sole trader you pay tax on the profits of the business and this can be up to 52%.
As a limited company the tax on profits is 12.5%, although directors will still pay income tax through payroll on their salary.
As a sole trader you need to submit an annual personal tax return and pay any taxes owed to Revenue by the end of October each year (extended to mid November if you pay and file your return through ROS). You will also have to pay preliminary tax towards profits in the current year to avoid interest charges by the Revenue Commissioners.
As a director and shareholder of a limited company you become an employee of the company and the company deducts payroll taxes each month which are submitted and paid to Revenue. You will need to submit a personal tax return to Revenue in the same way as a sole trader however the taxes on your salary will have already been paid.
The company must file a Corporation Tax return 9 months after the company’s year-end, pay the tax owed and pay preliminary tax based on the current year profits.
As a sole trader you can make pension contributions but these are limited. You will get tax relief for pension contributions based on your age.
In a limited company you can make pension contributions with the same relief limits as a sole trader however the company can also make contributions to your pension. This can significantly increase your accumulated contributions and the contributions are deductible by the company thus reducing its taxable profit.
Filing of accounts
As a sole trader you only file your accounts information to the Revenue Commissioners and all the information is kept private.
As a limited company, in addition to filing your Corporation Tax Return, you must submit an abridged set of accounts and an annual return to the Companies Registration Office and this information is then available to the public. The public can view an abridged set of your accounts and see who owns the company. They can also see personal information such as your address and date of birth.
Setting up a limited company may give you credibility and sometimes it may make your business seem bigger and more professional.
Once you are registered for Vat the rates are the same for a sole trader as they are for a limited company.
The following case study shows the tax savings if you do not need to extract all the profits for personal use:
Tax on Directors Salary
31,200 (60,000 *52%)
Total Taxes Paid
Personal bank account
Company bank account
Bank account totals
This article is for discussion purposes only. For further information on any of the topics covered in this article please contact a DBASS adviser on ph. 01 849 88 00.
by Daniel Blair, DBASS Chartered Accountants.