Benefits and Disadvantages of Operating as a Sole Trader
Benefits of operating as a sole trader in Ireland
- 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 of operating as a sole trader in Ireland
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.