Member of the Institute of Chartered Accountants in Ireland
Company or sole trade

Incorporating a business may be advantageous but careful assessment of the individual circumstances of each case is vital as it may be disadvantageous. Issues to consider include limited liability protection, tax rates, being a separate legal entity, statutory filing obligations and new legislation.

For example, a sole trader does not have the protection of limited liability which is the principal advantage of a registered company. Thus the personal assets of a sole trader such as their home may not be protected if employees or customers sue them. It must be noted that it is only the shareholders’ liability that is limited, as the company must treat all creditors equally and is liable for all debts and liabilities.

Another positive aspect to the incorporation of a company is the favourable corporation tax rate when compared with the marginal rate of income tax. Companies avail of special tax rates and accounting procedures that usually allow a better return on their profits. They also enjoy the benefit of increased pension contributions and in Ireland more favourable universal social charge treatment for director's remuneration. This is in comparison to a sole trade that is liable to income tax at the marginal rate on most of its profits, is also liable to social insurance and is limited in the amount of earnings that can be contributed to a pension.

Being a separate legal entity is an additional advantage of a company. A company is regarded as including the following three separate parts: the directors, the shareholders, the company itself. This provides protection to the directors and the members, as the company is its own legal person. The directors have a duty to report to the shareholders, even though they may be the same people and they must act in the best interests of the company.

A significant factor to consider before incorporating a business is that a company must file publicly available information that allows potential business partners or customers to determine whether they may be doing business with a reputable company or not. This information is available from the Companies Registration Office in Ireland and Companies House in the United Kingdom.

There are advantages to a sole trade. For example, as compliance obligations continue to increase as well as the heavily regulated environment that surrounds companies, this can deter sole traders from making the transition. By comparison, a sole trader has few administrative obligations and only has to file minimum tax returns annually, while a company has to file an annual return in Ireland or a compliance statement (previously an annual return) in the United Kingdom with annual accounts annexed. Companies are also obliged to file other tax returns and may be taxed heavily on the sale of certain assets, such as premises. If however, a sole trade chooses to transfer its trade into a company, subject to satisfying certain criteria, tax relief may be available.

Further obligations on company directors require them to include a policy statement in the annual accounts and an annual compliance statement in the directors’ report. However the obligation to prepare audited financial statements may be avoided by many companies resulting from changes to audit exemption thresholds.

It is important to note that each year all companies must submit by the due date an annual return to the Companies Registration Office in Ireland or a compliance statement to Companies House in the United Kingdom together with financial statements. Failure to comply will result in financial penalties and in Ireland will also result in loss of audit exemption.

Company directors have many duties and the advantages of separate legal entity, limited liability protection and favourable tax rates have to be compared against the high level of compliance, reporting and filing obligations involved in running a company.

Donohue & Co. can advise you according to your circumstances and assist you to make the correct choice for your business.