By Jason McDowell, owner of McDowell & Co Accountants
More and more people are finding themselves in a position where they want to start their own business. The recession has forced this on those who have been made redundant or simply cannot find a job through the PAYE system.
Having gone through the situation myself, I can honestly say the rewards of running your own business do far out way the security of being in paid employment.
But it isn’t easy. There are many issues to understand and hurdles to overcome with setting up your own business. As well as getting a grasp of the tax system in Ireland, managing cash flow, and trying to be an expert in IT, HR, Marketing, Accounting etc., you will also have the choice at some stage of whether you should operate as a sole trader or a limited company.
In this post I have outlined a simple table to show the differences between the two, which lets you decide what option might be best for your business.
|Sole Trader||Limited Company|
|Set up cost||Free to set up with Revenue Commissioners||Free with Revenue Commissioners but about €300 to set up company with CRO|
|Annual Fees||n/a||CRO fee €20/40 (companies office)|
|Annual Returns||Form 11 Return to Revenue(income tax return)||CT1 return (Corporation Tax)And B1 to CROForm 11 returns for directors also.|
|Tax rates||Similar to PAYE but you lose your PAYE tax creditI.e. profit €32800 at 20% with balance at 41%||Corporation tax rate 12.5% (10% for manufacturing).Director’s salary at PAYE levels with no PAYE tax credit.|
|PRSI Rates||4% with a minimum of €253||No PRSI on profitsPRSI on directors pay at 4%|
|Taxable Expenses||All costs must be fully receipted for example motor costs, travel etc.||Director’s claims for travel, accommodation and subsistence completed through vouched expense claims.This is tax free to the director.|
|Accounting Fees||Anywhere from €375- €1,000 plus VAT.||Starting at €750 plus VAT.Audit required if company misses annual return and this is expensive.|
|Employer||If it is just yourself then there is no need to register as an employer||Directors are employees so you must register and file P30 / P35s etc. (extra cost).|
|Liability for debts||Unlimited – your personal assets can be||Limited to the company only.|
|Succession of Business||Business ceases with death of owner||Shares can be passed / sold on so business does not cease.|
|Cessation||Simple to cease business and free with Revenue.||Expensive to cease business with CRO|
|Disclosure of Accounts||Public does not get to see accounts as they are filed with Revenue.||Public can access summary accounts if the pay small fee with CRO.|
|Access to funds||Difficult||Limited company status can be looked upon favourably by banks.|
To conclude, sole trader route is the cheapest route but it may not be the best! You can however, take this route initially and then when it makes more sense go down the route of forming a limited company.