Every business, whether big or small, needs a legal structure. It can either be a limited company or a sole trader. Approximately 3.4 million operate as sole traders, making it the most popular legal structure. Meanwhile, there are 1.9 million businesses operating as a limited company, making it the second most popular legal structure.
Find out the differences between the two by comparing their advantages and disadvantages to determine the business structure that better suits your needs.
What Is A Sole Trader?
A sole trader is the simplest and most popular business structure. It is essentially a self-employed person who is the primary owner of the business.
Once tax payment is complete, they allow the individual to retain all profits. That same individual legally or financially runs the sole trader business.
Characteristics Of A Sole Trader
A sole trader is a business and not a company. Anyone that is looking to operate their own business can become one. Often, sole traders are the only employee within the business and not a director. Additionally, it is not a legal entity, unlike a limited company.
Steps To Becoming A Sole Trader
- Register the business’ name
- Set up a bank account for the aforementioned business
- Register for tax and Pay Related Social Insurance (PRSI)
- Identify a method of keeping accounting records
What Are The Obligations Of A Sole Trader?
Sole traders are completely responsible for using their personal income to cover debts or expenses incurred if the business fails. They have a legal obligation to register as a self-employed person with revenue in order to meet tax requirements.
Except for sole traders operating under their own true name, it is also their obligation to register the name of the business they are trading under.
Advantages Of Being A Sole Trader
- Compared to a limited company, it is easier to set up and close.
- It requires relatively little paperwork, other than an annual self-assessment tax return.
- The costs of setting up and registering a business name are low.
- Annual accounting fees are also low, depending on the cash flow of the business and how well they keep their accounts.
- It has greater privacy than incorporated businesses (e.g. end-of-year accounts are not made public).
Disadvantages Of Being A Sole Trader
- If the business declares bankruptcy, the sole trader is personally responsible for debts. It has unlimited liability as the law does not view it as a separate entity.
- The registered business name of sole traders can be copied.
- Banks and other investors tend to prefer limited companies, therefore limiting the expansion opportunities of a sole trader.
- They can be taxed up to 52% on their income.
What Is A Limited Company?
A limited company is a privately held business with its own legal identity. It is separate from its shareholders (owners) and its directors (managers). Even if the individual runs the company as the shareholder and director, it is still a separate legal entity. They must submit company accounts and reports to the Companies Registration Office (CRO) each year.
An individual or group of people owns a non-limited or an unlimited company. They have unlimited liability in covering debt or fines in the event of bankruptcy.
Private And Public Limited Company
A private limited company (LTD) is a type of privately held business. It limits the liability of the members to the amount of share capital they contributed. This is in the case of the company being dissolved. Private limited companies do not trade their stock on public exchanges.
Features of a Private Limited Company
– The maximum number of members is 149
– They do not need a memorandum of association
– In a private limited company, the minimum number of directors is only 1, and they must have a separate secretary
– No need to state objects in its constitution
A public limited company (PLC) is a company that has limited liability. It allows the trading of company shares with the public.
Features Of A Public Limited Company
– The maximum number of shareholders is unlimited
– In a public limited company, the minimum number of directors is 2
– They cannot operate without the holding of an Annual General Meeting (AGM)
Advantages Of A Limited Company
- Shareholders, not directors, are responsible for the debt if the company declares bankruptcy. This is because a limited company is a separate legal entity.
- The registered business name is protected and cannot be copied.
- They qualify for corporation tax at 12.5%
Disadvantages Of A Limited Company
- Due to the company’s size and cash flow, accounting fees are generally higher.
- Limited company has larger amounts of tax returns.
- Company accounts are made public with the CRO.
- Closing the company may require the assistance of a professional.
Sole traders may be the most popular legal structure among business owners. But, there are also benefits and advantages of having a limited company. Here are some reasons a limited company may be better for you than being a sole trader.
Having limited liability is one of the biggest benefits of a limited company structure. If you want to operate as a sole trader, you would have to be completely responsible for your business and finances. As a business owner, you and your business are one entity. There is no difference between your personal assets and the business assets, so they can be in danger once you go in debt.
This is not the case for limited companies because the business itself is a separate entity. Therefore, it is better to have limited liability to protect your personal assets and finances should anything go wrong with your business.
Another advantage of operating through limited companies is that you are more tax efficient. As a limited company owner, you only have to pay a corporation and dividend tax. Meanwhile, sole traders will have to pay tax on their business profits.
Limited companies come across as a better model to work with than sole traders. This is because they have limited liability. Businesses, clients, contractors, etc. are more likely to work with them because they perceive a limited company as more professional than sole traders. It can build a good reputation making it more credible to any parties that want to work with your business.
Ultimately, it is important to consider all factors before choosing a legal structure that fits your needs. Weigh all the pros and cons before making a final decision. You can be a sole trader which is the most popular option for business and the easiest to set up. But operating through a limited company structure has clear advantages and benefits as well.
Most businesses prefer limited companies as they are more tax-efficient and more professional. Aside from these, they are a better structure than a sole trader because you have limited liability over your assets and finances.