Feature articles

Ireland: Operating as a sole trader Vs. a Limited Liability company.

By Donie Neylon
of Slattery & Co. Chartered accountants

LIMITED LIABILITY COMPANY A number of sub contractors are faced with the decision of whether or not they should continue to operate as a sole trader or form a Limited Liability Company.

Decision to form a Company
The decision to transfer your business to a Company should be based on sound commercial reasons and not just on short term tax savings. The critical issues are;

How much is the business going to develop?
Are profits to be left in the Company or paid out regularly in the form of salary/dividend to shareholders/directors? The level of trading risks ie. receiving or granting goods or services on credit or the likelihood of a claim.

Advantages of forming a Limited Liability Company
The main advantages of having a business carried on by a Company are as follows;

Lower tax rates
From 1st January 2001 a Corporation Tax rate of 12.5% applies to the first £200,000 of a Company’s trading profit. This compares with current Income Tax rates of 42% and 20% respectively.

Cash flow
A Company pays its Corporation Tax six months after the end of its accounting year which is after the income subject to tax has been earned. A sole trader pays Preliminary Tax in October each year which is before the income of that tax year has been fully earned.

Pension funding
A Company can generously fund contributions to a pension scheme on behalf of its directors and employees. In the case of a sole trader contributions to a pension fund are much more restrictive than they are when the contributions are made by a Limited Company.

Limited Liability
While the Company is controlled by its shareholders and directors, it is a totally separate legal entity and personal assets should be protected in the event of a Company incurring substantial losses or going into liquidation. However, in practice Limited Liability may not be much of an advantage as banks and creditors often require personal guarantees from directors in respect of Company debts where the Company is receiving substantial credit.

Disadvantages of incorporation
The main disadvantages of having a business carried on by a Company are as follows;

Cost of incorporation
The cost of incorporation is approximately £450 plus VAT.

Annual Audit
The Company must carry out an annual audit each year.

However, if a small Company meets certain criteria it is not obliged to carry out a statutory audit.

Books and records
The Company must maintain proper books and records which is the responsibility of the directors.

Company Office Returns
The Company not only has to comply with tax legislation but also with Company Law. In this regard it must submit Abridged Financial Statements together with an Annual Return to the Companies Registration Office in Dublin each year. There are deadlines for the submission of these documents and there can be serious implications, not only for the Company but also for its directors if these deadlines are not met by the Company. There is a loss of confidentiality as any person can inspect the Accounts submitted to the Companies Office in Dublin.

Taxation - double charge
All Companies pay tax on its profits. The main problem facing the directors is to extract profits from a Company in a form that minimises personal tax liabilities. In reality it is difficult to avoid incurring an Income Tax liability on the extraction of profits from a Company.

Summary
You will need to look at the direction your business is heading and whether it will generate substantial profits on a consistent basis into the future. All these issues need to be carefully reviewed before making any decision in relation to the formation of a Company and the transfer of a business to a Company. Remember you can always form a Limited Liability Company and transfer your business to it. It is not so easy to transfer from a Limited Liability Company back to a sole trader because of tax issues etc.

This article is issued for guidance purposes only and does not set out to cover all issues involved in the decision to transfer your business to a Limited Liability Company. Anyone interested should obtain professional advice in relation to the matter.

Donie Neylon
Slattery & Co. Chartered Accountants
Springfield Court
Victoria Terrace Ennis Co. Clare.
Tel: 065 - 6820237
Fax: 065 - 6820439
email: slaccens@iol.ie

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