An important decision point for every sole trader in Ireland is whether to incorporate their business, and when it makes sense to do it.

Some business owners in Ireland will incorporate from the very start, while others will commence as a sole trader and either remain this way or at some point may decide to transfer their business to a limited company.

In this guide we will help you, a sole trader or self-employed businessowner in Ireland, think in the right way about what is the best structure for your business.

Benefits & Disadvantages Operating as a Sole Trader

Benefits

  • Offers a degree of flexibility for freelancers, contractors or self-employed professional or trade providers in the sense that money from your business is received directly by you rather than into a private limited company.
  •  There is no need to operate a payroll to pay yourself (though if you have staff, you will need to run payroll to pay them), and you don’t have to pay taxes on your income on an ongoing basis throughout the year, just when you file your annual tax return.
  • You will have less compliance requirements and less administrative work as you won’t have director responsibilities and you won’t have to worry about company office and annual financial statement filing requirements. As a result, your professional costs will generally be lower.
  • Their will be less financial information about your business in the public domain, as you do not have a requirement as a sole trader to file accounts with the companies registration office (CRO). As a result, your competitors will be unable to publicly access a set of financial statements relating to your business.
  • You will own any business assets used by the business in your own personal name. This is important because when you go to sell the assets at some point down the line, you will receive the sale proceeds directly yourself, and pay capital gains tax yourself and you are then personally left with the balance. In a scenario where a company owns the business assets, the company must pay capital gains tax (33%) if and when the assets are sold AND THEN you will have to pay more taxes personally when you go to take the balance of the money out of the company – in effect, you are being hit with a double tax charge on the sale of your business assets!

 

  • If you make a loss in your sole trader business in any given year, and if you have other sources of income outside of your sole trader business (for example, rental income or other), you can offset your sole trader loss against that other income in that tax year to save on your tax bill. If a loss is incurred in a company, no such offset against other personal income streams for tax purposes is allowed – though the loss is allowed to be carried forward in the company against future profits earned by the company.

Disadvantages

  • You are the business and therefore if you have any claims against you, you are personally on the hook. In other words, you do not have the protection of limited liability which you would benefit from in operating your business through a company.
  • You have limited scope for pension planning as a sole trader. The amount you can contribute to your pension tax-free each year as a sole trader is capped based on your level of earnings and your age. If you operate your business through a company, you can avail of tax-free employer pension contributions which are not subject to the same limits. This is particularly important for sole traders in their 40s or 50s as they get nearer to retirement age and perhaps have excess income and want to top up their pension while they can.
  • As a sole trader, it is generally more difficult to introduce outside investors as you do not have a corporate or shareholding structure.
  • Certain tax reliefs targeted at helping a business raise additional investment or funding do not apply to a sole trader structure. For example, EIIS, SCI or SURE relief (more info below) will only apply to businesses operated as a company. As a result, it may be more difficult to raise finance to fund trade expansion.
  • If you earn more than the amount you actually need to cover your personal living expenses (which is usually not a bad thing!!), as a sole trader the excess income is all subject to income tax – which as you know in Ireland can be as high as 55% (incl. PRSI & USC). By contrast, if you operated your business as a company, one strategy you might take is to just draw the amount of salary that you require from the company to cover your living expenses so that any “excess earnings” is left in the company and is only taxed at the corporation tax rate – currently 12.5%. The excess earnings left in the company can then be reinvested in your business, paid into your pension tax-free or held in the company bank account for future tax efficient retirement cash extraction planning.

I am Currently Operating as a Sole Trader: Should I Incorporate my Business and If So When?

A general rule of thumb is that if you are earning more than you need from you sole trader business to cover your personal living expenses, it is a good time to consider the incorporation route. However, this is not the only factor that might prompt an incorporation, and below we have listed the key considerations for self-employed professionals, contractors, freelancers, and other sole traders in Ireland in deciding whether it is time to incorporate.

The “basic” incorporation considerations for a sole trader in Ireland

  • Anticipation of significant profits in the next couple of years – if profits expected to increase, may be a good time to incorporate to benefit from lower corporation tax rate compared to income tax rate.
  • Introducing a new investor or owner into the business – a shareholding structure might be preferable to create a clear ownership structure and to formalise the business structure.
  • The need you may have for limited liability protection – look at the commercial nature of your business and assess what level of risk you are willing to take on board in a personal capacity.

The “more-complicated” incorporation considerations for a sole trader in Ireland

  • If you are starting up a new business in Ireland, and looking to raise finance, consider commencing trade of the new venture at the outset as a company. Investors can claim a valuable tax relief on their investment in your business depending on various other criteria. For example, under the Employment and Investment Incentive Scheme (EIIS) or under the Start-Up Capital Incentive (SCI), a family member, friend or other investor could invest in your new venture and claim back 40% of the amount they invested into your company (revenue has extensive rules on these reliefs, one of which is that the business is operated as a company and was not previously operated as a sole trader). This can be a much more attractive funding option for you – equity investment from a friend or relative (SCI) is likely to be on better terms than debt financing from a bank – and it can be an attractive proposition for a potential investor also. Professional advice is recommended, and we would be glad to work with you.
  • If you are seeking to borrow a significant amount of money to fund your business or to buy a significant business asset, you might consider using a company structure. This is because the capital repayments on your loan are not allowed as a deductible expense when you go to calculate your income or corporation tax bill. As a result, you might be able to repay borrowings more quickly from a company – corporation tax (12.5%) is paid, rather than having to pay income tax (up to 55%) before repaying the loan.  
  • If you are looking at your retirement plan or seeking to maximise your tax-free pension contributions, provided you are earning more than you currently need to cover your living expenses, the incorporation option may provide benefits to you – this is because excess earnings will be taxed in a company at the corporation tax rate (rather than at the income tax rate), and also because tax-free pension contributions in the form of employer contributions can be made from a company into your pension and this type of contribution is not subject to the same caps or limits imposed on personal pension contributions made by a sole trader. Professional advice is recommended, and we would be glad to work with you to develop your retirement plan.
  • You may have been operating as a sole trader for a number of years, and if so the opportunity might be available to you to sell your sole trader business to a private limited company that you set up, and again depending on criteria, you can claim a valuable capital gains tax relief meaning that you will pay just 10% (entrepreneur relief) or even 0% (retirement relief – read more here) capital gains tax on the sale proceeds (as compared to 33% full capital gains tax rate) – this money can be owed to you from the new company and paid to you over a couple of years, rather than taking a salary over that time which would be subject to income tax. Again, professional advice is recommended here & SCK Group can help.

How do I set up a company?

Should I Just Remain as a Sole Trader?

A lot of people think that they should incorporate by default due to hearing about the headline corporation tax rate of 12.5% on company profits –  but it is not as simple as that! You still have to extract money from your company before you can use it personally, and whether you take money out from your company by salary, by dividend or by rent to yourself, you will be subject to income tax at that point.

There are tax efficient ways to extract cash from a company (and in some scenarios, if planned right, you can reduce the tax rate to nil), but this will only really apply to you if your business generates excess profits to your needs and you can afford to leave monies in the company or pay extra monies into your pension – we generally plan these strategies with our client by putting in place a medium to long term plan and working with them to guide them along the way.

Review the incorporation considerations in the sections above and do a sense check as to whether any apply or might apply to you. If not, you are likely better off continuing as a sole trader – there are several advantages to operating as a sole trader as outlined in the first section, and if you want to keep things simpler on the compliance & administrative side, a sole trader structure might still be the best fit for you. If you would like to talk about the best structure for your business in Ireland, we would be glad to help