the difference between a sole trader or limited company

Sole Trader or Limited Company

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What Is A Limited Company?

Limited And Non-Limited Company

A limited company is a separate legal entity and is detached from the shareholders and directors. The liability of company members is limited to what they have invested in the company.    

A non-limited/unlimited company is owned by a person or group of people that have unlimited liability to cover debt or fines in the event of a bankruptcy.  

Becoming a limited company requires the company to register with the Companies Registration Office (CRO). Limited companies must submit company accounts and reports to the CRO each year.

What Is A Private Limited Company (LTD)?

This is a type of privately held business which limits members liability to the amount of share capital contributed by them when the company is being dissolved. Private limited company stock is not traded on public exchanges.

Features Of A Private Limited Company

  • Maximum number of members – 149
  • No memorandum of association necessary
  • Minimum directors in private limited company – 1 (must have seperate secretary)
  • No objects need to be stated in its constitution
Example Of Private Limited Company

Virgin Atlantic Airways LTD

What Is A Public Limited Company (PLC)?

This is a limited liability company that allows the company shares to be traded with the public.

Features Of A Public Limited Company

  • Minimum directors in public limited company – 2
  • Maximum number of shareholders – unlimited
  • Cannot operate without the holding of an Annual General Meeting (AGM)
Example Of Public Limited Company

Vodafone Group PLC

Who Can Be A Director Of A Private Limited Company?

There is no obligation for a director to hold any formal qualification.

However, in part 3.6 of the CRO’s company incorporation leaflet, there is a list of certain persons that cannot become directors. These are as follows:

  • “A body corporate
  • An undischarged bankrupt
  • An auditor of the company
  • Anyone under the age of eighteen. (section 131 Companies Act 2014)
  • As specified by the constitution e.g. if a director fails to attend board meetings without reasonable excuse for a specified period of time, or he/she becomes of unsound mind
  • A person disqualified as a director by the High Court under section 842 Companies Act 2014 is debarred from becoming a director for the period specified in the court order1
  • A person who has been convicted on indictment of any indictable offence in relation to a company, or any indictable offence involving fraud or dishonesty, is automatically disqualified for five years (or for such period as the court may order) from being appointed as a director or from being concerned in any way in the promotion, management or formation of any company
  • If an appointment as director would cause a person to exceed the statutory limit on the number of directorships imposed by section 142 Companies Act 2014, that appointment is void.
  • A person restricted as a director by the High Court pursuant to section 819 Companies Act 2014 may not become a director of a company for a period of five years, unless the company has a minimum fully paid up share capital of €500,000 in the case of a public limited company or public unlimited company, or €100,000 (any other company).”

Does A Director Have To Be On The Payroll?

If the director is taking a salary from the company, then they will need to be included on the payroll. In other words they would need to pay PAYE..

What Is A Sole Trader?

Another type of business is one that is run by a sole trader. A sole trader is an individual who is identified as the primary owner of the business and is authorized to retain all profits once tax payment is complete.

What Does It Mean To Be A Sole Trader?

A sole traders business unlike a private limited company does not have a limited liability and is legally/financially run by the same person.

Can A Sole Trader Have Employees?
  • Sole traders are often found to be the only employee within the business, however, they can have employees once they register for employer PAYE.

What Are The Characteristics Of A Sole Trader?

  • Is a sole trader a company – No, a sole trader is a business
  • Is a sole trader a director – No
  • Is a sole trader a legal entity – No

Who Can Be A Sole Trader?

Anybody that is looking to operate their own business can become a sole trader.

A few of the necessary steps along the way to becoming a sole trader are:

  • Register the business name
  • Set up a business bank account
  • Register for tax and PRSI
  • Identify a method of keeping accounting records

Who Can Prepare Sole Trader Accounts?

Generally, sole traders are responsible for keeping their own accounts, but keeping tabs on the profit/loss is made easier through accounting software like Relate, Xero or Sage. Depending on the overall cash flow, sole traders may look for an accountant.

Obligations Of A Sole Trader

  • If the business fails, the sole trader is completely responsible and is obliged to use personal income to cover debts or expenses incurred.
  • To meet tax requirements, sole traders are legally obliged to register with Revenue as a self-employed person
  • It is the obligation of a sole trader to register a business name they are trading under. The only exception to this rule is if the sole trader is operating under their own true name.

Does A Sole Trader Need A Payroll?

Sole traders only need a payroll if they have employees. Sole traders themselves would not be included on the payroll.

What Is A Partnership?

Similarly to a sole trader, a partnership is a business with no legal entity but is run by two or more people

Features Of A Partnership

  • Minimum amount of people in partnership – 2
  • Maximum amount of people in partnership – normally 20, however, can reach 50 for certain financial partnerships
  • Consists of at least one general or precedent partner (liable for debts & completing firm obligations)
  • Not a necessity, but also can include a limited partner (Only contributes fixed amount. In the case of bankruptcy, limited partner is not liable for debts which surplus their original contribution)

Sole Trader Or Limited Company Pros And Cons

So, we’ve reached the question – which is better, sole trader or limited company?

Pros And Cons Of Limited Company

Advantages Of A Limited Company

  • Limited companies are a separate legal entity, which means shareholders are responsible for the debt if the company declares bankruptcy, not directors.
  • The registered business name is protected from being copied
  • Limited companies qualify for corporation tax at 12.5%

Disadvantages Of A Limited Company

  • Company registration costs with a company formation agency are approximately €300, which is a lot higher than initial sole trader setup costs
  • Accounting fees are generally higher than a sole trader’s, due to the company’s size and cash flow
  • Larger amounts of tax returns when compared to sole traders
  • Company accounts are made public with the CRO
  • Closing the company is a process that may require the assistance of a professional

Pros And Cons Of Sole Trader

Advantages Of Being A Sole Trader

  • Easier to set up and close than a limited company
  • Set up costs are low (business name registration is €20 online)
  • Annual accounting fees are low from about €500 (Depending on cash flow and how well accounts are kept)
  • Small amounts of annual tax returns to complete
  • End of year accounts aren’t made public

Disadvantages Of Being A Sole Trader

  • Sole traders are personally responsible for debts if the business declares bankruptcy.
  • Registered business name can be copied
  • Sole traders can be taxed up to 52% on their income

When To Change From Sole Trader To Limited Company?

It could be suggested that a good time to change from a sole trader to a limited company would be when sole trader income begins to surpass the income tax standard rate cut off point of 20%

Setting Up A Company In Ireland

How To Register A Limited Company?

There are two options to choose from when registering a limited company:

  1. Use our services
  2. Send a constitution for the company and A1 form to the CRO along with the company fees for registration.

How To Register As A Sole Trader?

  • If you want to trade under a business name, you must register this name with the CRO
  • File a TR1 form to register for income tax
  • If you’re hiring staff, you will need to register for employers PAYE
  • If your business supplies goods or services over the VAT thresholds, you must register for VAT

How Much Is It To Set Up A Business In Ireland?

How Much Is It To Register A Limited Company?

The cost of setting up a limited company with a company formation agency depends on the services you require. These services can range from:

  • Company formation package €150 – €300
  • Company seal €50 – €60
  • Annual company secretary –  €300 – €400
  • 1 year registered office address – €250 – €350
  • 1 year business office address – €200 – €300

How Much Is It To Register As a Sole Trader?

The only immediate cost to setting up as a sole trader is name registration which costs €20 online

How To Name Your Business?

Registering your new business name is a required step in the company formation process. The only way to avoid having this registration process, is if you wish to use your own true name as your business name.

An important point to note in this process is that there are restrictions enforced on name selection by the CRO. A few of the grounds for refusal are:

  • If the chosen name is too similar or exactly the same as another company already listed on the register of companies
  • If the name is found to be offensive
  • If the name is suggesting a form of state sponsorship
  • If the name denotes another type of business entity

Please be sure to follow the process as outlined by the CRO for business name registration.

Where Should Your Business Name Be Displayed?

The name of the business must be displayed outside all offices/workspace where any form of business is carried out.

Where Can I Find Information On A Limited Company?

To find information on a limited company, you can company search with the CRO or browse with Solocheck