If you are trying to decide on whether you should set up as a sole trader or a limited company there are three things you should consider – tax, liability, and cost. Looking at these areas will help you make the right choice.

Tax

You have probably heard that there are tax benefits to setting up as a limited company. It’s true, but it doesn’t apply to everyone. In fact you might find you pay exactly the same amount of tax regardless of whether you are a sole trader or limited company.

Why is that important? Running your business as a limited company involves more costs and administration time than running it as a sole trader. There are also more rules. If you are not getting the benefit of lower tax you have to consider whether or not it is worth it. A simple test is to ask yourself how much of the profits of the business you need to live on. If you need everything you will most likely pay the same amount of tax regardless of the company structure. If, on the other hand, the business makes a profit after you take out your salary, you could benefit from a limited company structure. This is because profits are taxed at the corporation tax rate of 12.5 percent as opposed to personal tax rates, which are up to 55 percent when income, PRSI and USC are all taken into account.

Pensions should come into your tax considerations too. In a limited company you get a larger amount of tax relief on pension contributions than you do with personal pensions, and the thresholds are higher. But if you are taking the full profits from the business as your salary, you will probably find it more beneficial to set up as a sole trader.

Liability

One of the key differences between a limited company and a sole trader is liability. In most circumstances the directors of a limited company are not liable for the debts of a business whereas a sole trader is.

The reality of this is much more complicated though. For example, most banks require directors to make personal guarantees when offering loans. Liability is therefore a factor, but you have to look at your own business and personal circumstances.

You also have to factor in other things such as risk and reputation. If your business operates in a sector that involves a large amount of risk, a limited company could offer you a level of protection.

Cost

Once you have thought about tax and liability you have to consider cost. The equation is simple: limited companies cost more in terms of both time and money. There are also more rules, and with rules come penalties if you fail to comply.

That means registering as a sole trader is much simpler and more cost effective. You will need to register as a sole trader with the Revenue Commissioners and submit an income tax return once a year (deadline 31 October of the following tax 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 other structures.

A Limited company on the other hand will need to prepare financial Statements (accounts)every year together with a Corporation Tax return and an Annual Return to the Companies Registration Office. It requires more accounting and tax work but the additional fees involved may be covered by the tax savings in running the business through a company. A company also provides a structure for introducing additional investors, giving shares to key employees or family members and selling shares in the business. Closing down a company is more difficult and expensive than for a sole trader especially where there are outstanding debts and a liquidator is appointed. So you just really have to weigh up whether you get enough of the benefits afforded by a limited company to justify the costs involved.

So in the end this all depends on how you see your business developing, who will be involved, and who your clients will be. The choice is not as straightforward as it may seem. And remember, just because you think it might be better to operate as a sole trader does not necessarily mean you are setting your sights too low.

The choice is yours, but be sure you consider all the relevant factors before taking the plunge. Remember that you can set up as a sole trader and change to a limited company at a later date. If you need help setting yourself up as a sole trader or a company, or if you are just looking for an advice, you can always consult with Peak Finance Solutions.