Legal Format of Enterprise:

Should I remain a sole trader or become a limited company?

The starting point in the decision to incorporate for any sole trader is to review whether the profits of the business are higher than the amount of money you draw personally from the business. If the profits are not surplus to personal requirements, you should park the idea until they are.

By incorporating a company, a sole trader can avail of ‘‘limited liability’, which means that shareholders can insulate their financial position from that of the company. However, limited liability will not protect directors in cases of reckless trading, negligence and fraud.

Changing your status to limited liability should be contingent on a number of factors including anticipated profits (or losses), the type of business, liability protection and pension preferences.

If your company’s profits are set to be particularly good, it could make sense to incorporate.

For example, if a sole trader records a profit of €100,000, this will automatically be taxed in their own name at 42 per cent plus PRSI and levies.

However, if the €100,000 trading profit arose within a company, corporation tax of 12.5 per cent would be payable on the income. The benefit of the lower corporate tax rate will result in more surpluses to be channelled back into the business.

If the business is loss-making, it may be more appropriate to take these losses in your own name because sole trader losses can be offset against other sources of income to reduce tax liabilities.

Your decision could also be dictated by the type of work you do.

Some industries prefer to ‘employ’ consultants so that they don’t have to worry about employee payments, payroll and compliance, but can have an aversion to sole traders as they are seen as a bigger liability.

Also, if you are worried about unlimited liability because of employees or the work you undertake - for example, construction - you may be more protected by taking limited liability, as your personal assets are not exposed by claims made against the business.

Pension funding can also be a factor for setting up a company.

In general, directors who own at least 5 per cent of the company can avail of a much higher level of pension funding, using company contributions, and the company can take a full deduction for these amounts in its accounts.

Sole traders must fund their own pensions and they have limited tax relief for pension contributions made to their own personal scheme based on a percentage of earnings and the age of the person.

Owner managers should recognise that incorporated status brings with it a plethora of regulations, stipulations and additional costs.

Compliance, setting up a company and liquidation bring charges that are not incurred if you’re a sole trader and directors’ responsibilities are increasing.

The onus is on the company directors to make timely annual returns, keep proper books of account, deal with environmental legalities, health and safety, and employees’ legislation, and a failure to do so is considered a serious offence.

In conclusion, assess the financial health of your business before making a decision.

Knowing where your business is going will help you make an informed decision about what is best for you. Contact us for more information and advice.

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