Should I be a sole trader or limited company?
If you're self-employed or planning to start your own business, one of the first major decisions you'll face is how to structure it. Should you operate as a sole trader or set up a limited company? Each option has its own set of advantages and drawbacks, particularly when it comes to tax, liability, and administrative responsibilities.
In this article, we’ll explore the pros and cons of becoming a limited company to help you determine whether it’s the right move for your business ambitions and personal circumstances.
Some Advantages of Going Limited
1. Limited Liability
Directors' or shareholders' personal assets are protected and not at risk in the event of a winding-up or receivership. This provides peace of mind and financial security.
2. Attracting Investors
Investors are more likely to invest in a limited company due to the added protection it offers. Additionally, transferring shares is straightforward, making it easier to bring in new investors or exit the business.
3. Access to Bank Finance
Banks often prefer dealing with limited companies as they can secure additional guarantees or security, making it easier to obtain loans or credit facilities.
4. Tax Relief for Start-Ups
New companies may qualify for corporation tax relief for the first three years of trading, subject to certain conditions. This can significantly reduce the tax burden during the critical early years.
5. Tax Savings
Limited companies benefit from a lower corporation tax rate of 12.5% on trading profits, compared to the marginal tax rate for individuals, which can reach up to 55%. Additionally, companies do not pay PRSI on profits, further enhancing tax efficiency.
6. Enhanced Business Status
The inclusion of "Limited" or "Ltd" at the end of a company name adds prestige and credibility. It can create the perception that the business is established and professional, which may attract more customers and partners.
7. Exclusive Company Name
Once registered with the Companies Registration Office (CRO), the company name is protected. No other business can register the same name while the company remains on the CRO register.
Some Disadvantages of Going Limited
1. Administrative Burden
Operating as a limited company involves additional administrative responsibilities, such as submitting annual accounts, tax returns, and other statutory filings to the Companies Registration Office (CRO).
2. Reduced Privacy
A limited company’s details, including financial accounts and directors' information, are publicly accessible on the CRO register, reducing privacy compared to sole traders or partnerships.
3. Bank Finance Challenges
While banks may prefer dealing with companies, they often require personal guarantees from directors, which can put personal assets at risk despite the limited liability structure.
4. Restriction on Losses
Losses incurred by a company cannot be offset against the personal income of directors or shareholders. They can only be utilised within the company itself.
5. Mixed Use of Assets
Using company assets for both private and business purposes can lead to tax complications, PRSI liabilities, and increased reporting requirements, making compliance more complex.
6. Directors’ Legal Responsibilities
Directors are personally responsible for ensuring that statutory documents are delivered to the CRO on time. Failure to comply can result in criminal offences, late filing penalties, and reputational damage.
7. Separate Legal Entity Challenges
Directors and shareholders may struggle to maintain a clear distinction between the company’s affairs and their personal finances, which can lead to compliance issues and potential legal complications.
Thinking of Going Limited?
Lots of businesses start out as sole traders and then decide to make the jump into a limited company. Read our article on how to I make the choice to move and the tax implications of incorporating here
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Last updated: 28th May 2025