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Choosing the Best Structure for Your New Business

I have recently made the decision to become self employed, but am unsure as to whether I should operate as a limited company or a sole trader. Can you offer any advice?

One of the first questions faced by a new entrepreneur is which legal form their business should take. The decision on whether or not to incorporate your business will depend on a number of factors, including the type of business, who you will be doing business with, whether you will require any outside investment and your overall attitude to risk.

Sole trade businesses are owned and run by a single individual. They are easy to set up, with very few formalities involved. This means that it’s also relatively straightforward to close the business should the need arise, something which unfortunately needs to be considered in these challenging economic conditions.

To get started as a sole trader, you simply need to register with Revenue for tax purposes. If you are going to trade under a name other than your own, you must register your trade name with the Companies Registration Office for a small fee. A sole trader is obligated to file annual Income Tax returns, with the deadline being the 31st October each year.

The main disadvantage of this type of business structure is unlimited liability. This means that should the business fail, you will be personally liable for its debts. Another point to consider is that when operating as a sole trader all profits will be liable to tax, whether you withdraw them from the business or not.

If you decide to set up a private limited company, the company will be a separate legal entity, distinct from those who own and run it. The key advantage of this form of business structure is that the liability of the company shareholders is generally limited to the amount paid for the shares. Exceptions would include cases where the owner/manager may be required to sign a personal guarantee, for example if required by the bank as a condition of a loan.

There are more formalities involved in setting up a limited company, and directors have certain obligations under company law, which should be considered before deciding to incorporate. Company accounts and reports must be filed with the Companies Registration Office annually and these accounts can be viewed by the public.

Apart from limited liability, there are other significant advantages of incorporation. Fewer restrictions on pension payments made through a limited company create more opportunities for tax planning.  If the company makes more profits than the directors require as salary, the excess is taxed at 12.5%. Compare this with a sole trader, where all business profits are subject to tax at the marginal rate, potentially 41% plus PRSI and Universal Social Charge.

As you can see, the decision on whether to incorporate your new business is a complex one, which ultimately will depend on the individual circumstances of your enterprise.