Side by Side Comparison & Guide: Sole Trader Vs Limited Company

Before we dive into the differences let us first understand what is a sole trader and what is a limited company are, to help you best understand which company formation route is best suited for you.

What is a sole trader?

A sole trader is an independent business owner who manages and runs their own business under their own tax number. Since you as a person and the business are one and the same, any losses the business experiences are your personal responsibility as a sole trader. Likewise, after paying taxes on the profits, you keep everything.

Individuals who operate their own businesses as sole traders are personally accountable for keeping accurate records of their business financial transactions. This includes filing an annual self-assessment tax return and, if your revenues exceed the VAT threshold, registering for VAT and filing VAT returns.

soletrader businessman working
startup team members working on project

What is a limited company?

A limited company has its own legal identity. As a result, it is a completely separate entity. The owners of the business are called shareholders and their liability is limited to the investment they made. (Therefore, “limited”)

The majority of limited companies operate on a “shares” basis. When a company is divided into shares, each share has a specific monetary value. The shareholders are then given these shares in turn for the capital invested.

This implies that shareholders’ liability is limited to the price of their shares therefore the shareholders of a limited company are not personally liable for the debts of the business in general (shareholders may have to sign personal guarantees when dealing with banks).

What is the key difference between a Sole Trader and a Limited Company?

Let’s take a look at some of the most significant differences between operating as a sole trader and as a limited company:

LIABILITY

In a limited company, your liability is limited to the amount invested in the company. However, as a sole trader, you are liable for any losses your business may incur.

COMPLIANCE

Compared to a limited company, the set-up and compliance for the sole trader is typically a little simpler.

TAX LIABILITY

There are a number of differences in tax rates and the tax treatment between sole traders and companies. For growing businesses, the advantages with a company can often outweigh any compliance costs.

INCOME

Business owners who take an income from their business have to be set up as employees of a limited company whereas they are not employees in a sole trader set up

Side by side comparison : Sole Trader vs Limited Company

Points
Sole Trader
Limited Company
Set up & Shut down

Simple. Just register and deregister

More complex but straight forward to set-up and strike-off.

Tax Filings

Income, VAT, PAYE

Corporation, VAT , PAYE

CRO Filings

Not required

Annual Return

RBO Filings

Not required

Must be kept up to date

Financial Statements

A simple set will do

Full set of statutory accounts required

Privacy – Financial Details

Not visible to public

Some info visible to public for a small fee

Access to credit

Less Likely

More Likely

Access to Grants & Schemes

Some schemes not available e.g. SURE, TOV, 

Generally more access

Credibility

Less perhaps

More perhaps

Legal Entity

You and business are one

Separate entities

Liability

Unlimited Liability

Limited Liability

Scope for tax planning

Restricted to %age of income

More options 

Compliance

Tax obligations mainly

Tax and Company Law. Agencies CRO / RBO etc. Large fines and penalties for non-compliance

Exit Planning & Succession

Straightforward limited options

More Options for exits

Company Shares

Not possible

Yes

Sell Company Shares

Not Applicable

Yes

TAX Return

Prepare each year

Prepare each year

TAX Liability

Profits are taxed as your income, can be taxed up to 55%

Profits are taxed at 12.5% (Corporation Tax)

Owner Drawings / Pay

No salary. Taxed on profit not drawings

Paid a salary. Taxed on drawings not profit

Business Name Registration

Need to register with CRO if using another name.

Need to register with CRO if using another name.

Financial & Salary Planning

Limited Scope

Higher Scope

Pensions and Retirement Planning

Strict limits on what you can invest and take benefits

More options in paying in and on retirement

Preferred business contracts

Less Preference 

Higher Preference

Comparison between sole trader and limited company

As you can see, there are numerous advantages and disadvantages to each type of business structure, so carefully weighing your options is essential.

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How to start as a Sole Trader?

In Ireland, starting a business as a sole trader is a simple and straightforward process. All that is required of you is to do is Register Your Business as a Sole Trader for Taxes (revenue.ie).

If you are trading under a name that is not your own you are required to register a business name with the CRO. This is not setting up a company.

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man in suite showing project on computer to a subordinate

How to start a Limited Company?

Setting up a limited company is more difficult than to setup a sole trader. You will need to select shareholders, decide on the ownership and share structure of the company, select a company name, company directors and a company secretary before you can officially register your business.

These are merely the fundamentals. You can get any additional information that you require from the Companies Registration Office of Ireland (CRO), which is also where the paperwork for your incorporation can be found. The name is recorded in a register, which prevents it from being used by any other companies in the future.