When an individual decides to set up a business, one of the most important decisions to be made is whether to trade as a sole trader/partnership or as a limited company.
What’s best depends on individual circumstances and the nature of the business.
Sole traders are taxed under the self employed provisions. They prepare accounts for the tax year which runs from 1st January to 31st December. The profit from these accounts is returned on a Form11 which must be submitted by 31st October of the following year.
Paperwork involved in running a company is more complex and time consuming :
Companies must comply with all the same tax rules as a sole trader. PAYE & PRSI must be deducted from all withdrawals that are not business expenses of the company.In addition company accounts must comply with the Companies Acts 1963 to 2009 and these accounts must be filed with the Companies Registration Office annually.
It is important to understand that the company is a separate legal entity to the owners. Although you own the company, you must pay taxes on all monies that are extracted from the company. You can look but you can’t touch!
All monies taken out by the directors are taxed under the PAYE system. Proprietory directors pay class S PRSI which is the same as sole traders. A director is considered a proprietary director if they have control of 15% or more of the issued share capital.
Directors must run the business in the best interests of the company. All monies earned while running the business are earned by the company.Directors can be held personally liable for the companies debts if they d0 not run the business in a responsible way.
Companies pay12½% corporation tax. Recently a new provision under Section 486C of the Taxes Consolidation Act 1997 provides relief from corporation tax for start up companies in their first three years of operation. The reality is that most start up companies do not make sufficient profit in the first few years of trading to benefit from this exemption. The additional paperwork and regulations involved in running a company may outweigh the tax saving.
However when a new business venture holds a degree of risk , setting up a company to run the business maybe the best way forward.Getting professional advice on what suits your particular circumstances can ensure that you make an informed decision.