I am currently running a business as a sole trader. Should I consider setting up a limited company?

There are very few disadvantages to setting up a company, and there are considerable advantages. The key benefits to having a limited company are:

  • Protection of limited liability – as a company is a separate entity, in general, terms this allows you to separate business liabilities from personal assets.
  • Raising finance – in general, companies find it easier to expand as raising capital/borrowing is easier. The repayment of borrowings is easier for a company as the after-tax income is higher, 87.5% after paying 12.5% corporation tax. For a sole trader, this is only 45%, having paid up to 55% income tax.
  • Building a pension fund – companies have a much wider scope for pension planning whereas sole traders are very restricted in recent years.
  • Continuity of the business – as a company is a separate entity, it can outlive you. For many businesses, this is crucial in preserving the longevity of a thriving business.
  • Passing on the business – as needs change, it may be desirable to introduce new investors into the business, or to alter the ownership structure. Shares in a company facilitate the various type of structures and shares.
  • Customer expectations – very often your customers are used to their suppliers operating through companies; this can add credibility to your offering.
  • Incorporation – is very beneficial where an owner does not need to extract all the profits as salary. Only the salary is liable to income tax, and the rest of the profit can be retained to reinvest in the business or repay debt and is only subject to the corporation tax rate of 12.5%, which is a much lower rate than the income tax rates of up to 55%.

“It is recommended that a business moves to a company format early in its live cycle and certainly before it takes on bank debt.”

As always, your personal and business future requirements will determine whether you should incorporate your business. For an existing business looking to incorporate there are some tax exemptions and reliefs that can mitigate any tax costs on incorporation e.g. Transfer of Business Relief from VAT and Transfer of Business Relief from CGT.

cash flow manage small business ireland

There are some potential downsides of having a company, but these should not be a disincentive. They include:

  • Annual compliance – forming a company means some formalities, such as filing accounts in the Companies Office annually.
  • Obligations and responsibilities on company directors will need to be met. None of these should be onerous for compliant businesses.
  • Cash extraction issues. A sole trader directly earns profits and owns the business assets directly. With a company structure, an extra layer is put between the owner and the business.

Overall, it is recommended that a business moves to a company format early in its live cycle and certainly before it takes on bank debt. It is possible to move existing debt and assets into a company, and businesses do this to make the repayments more manageable.

setting up a limited business

Suzanne O’Neill is an FCCA and a Chartered Tax Advisor with over 25 years’ experience working in practice advising family businesses. She manages the Baker Tilly Ryan Glennon midlands office in Birr, Co. Offaly.