#2 Sole Trader, Partnership or Limited Company -  What Difference Does it Make?

"We all make choices, but in the end our choices make us" - Ken Levine

When you are setting up a business, you have lots of decisions to make which may have a long term impact.

A key decision to make is how you will structure your business.  There are pros and cons to every business structure but hopefully this can help you in reaching the right decision for you and your business.  

Sole Trader

As a Sole Trader you are self employed, you make the decisions and as the boss,  you are in control of your own destiny! Of course this can be great as you can run the business the way you like but it does also mean that you are solely responsible for making the business a success.

While there is less legal red tape, less filings and requirements, Sole Traders are fully liable for any debt that the business incurs. 

Things You Should Know As A Sole Trader

You are responsible for paying all of your taxes on your business earnings and making correct payroll returns for any employees working in the business. Setting up as a Sole trader does not mean that you have to work alone necessarily, you can also employ others in the business.

All profits for the business are taxed at the appropriate income tax rate which can be up to 40%.  While there was some good news for Sole Traders in the 2020 Budget, the Earned Income Tax Credit increased by €150 to €1,500  providing some well earned tax relief to small business owners 

If a Sole Trader employs family members in the business, this is known as family employment and may have implications for social insurance.  Check out more on Citizens Information website under Becoming Self Employed

Main Advantages

- You are your own boss and have full control of decision making for your business.

- Simple to set up and shut down 

- Less financial reporting and filings compared to Limited Companies 

Main Disadvantages

- All business profits are taxed at the income tax rate of up to 40% - and you need to prepare annual tax returns 

- You are personally liable for any losses/debts that the business incurs

- If you are a 'one man or woman band', a lot of responsibility can be on your shoulders which can sometimes be overwhelming. 

Partnership

A Partnership is a formal arrangement where at least two parties have entered a legal agreement to run a business together and share the profits. There are different types of partnerships structures but the most common types are 

1. General Partnerships and

2. Limited Partnerships.  

1. General Partnerships 

This is where two or more parties agree to share both liability and profits for a business with a legally binding contract for the partnership business

Advantages of A General Partnership

- Two heads are better than one - with two or more partners  involved in the business, this should increase the skills, expertise and capacity to drive the business forward with common goals and purpose. 

-In general, all members of the business partnership share an equal role in how the business is run

Disadvantages of A General Partnership

- Similar to Sole Traders, business partners are liable for any business losses and debt incurred by the business. 

- Because there is more than one party to the business, key decisions must be agreed jointly by all business partners. 

2. Limited Partnership 

A Limited Partnership is similar to a General Partnership in a lot of respects but the key difference is that the Limited Partner only shares some of the Liability based on the amount they have invested in the business.

A Limited Partner can sometimes be called a "Silent Partner".  While they have invested in the business, they usually do not provide any support or influence in running the business. 

Limited Company

A Limited Company is a separate legal entity to its owners and this is the main difference in business structure from a Sole Trader or Partnership. The Limited Company is owned by its shareholders who own a certain percentage of the company (Equity).

All assets and liabilities are owned by the company itself so the personal assets of Company Directors are safe and not at risk in the event that there is a claim against the company or it cannot pay its debts.

Limited Companies can avail of a much lower corporation tax rate of 12.5% on business profits.  This is a significant difference in tax rates compared to Sole Traders and Partnerships.

Main Advantages

- Protection of personal assets for company shareholders 

- Lower Corporation Tax Rate 

- More tax reliefs and benefits than for self-employed 

Main Disadvantages

- It may take longer to set up a company and can be more expensive than a Sole Trader 

- More corporate filings and deadlines 

- Large penalties and fines for non-compliance  

There are a number of different types of companies, to see the different types and the differences between them you can CLICK HERE

Help is Available If You Need it 

Whether you decide to set up your business as a Sole Trader,  Partnership or Limited company there is plenty of support available to you as you go about starting your business.

Some include the Company Registration Office (CRO), your Local Enterprise Office (LEO),  Citizens Information, and Revenue who can provide valuable support and guidance to you throughout the early stages.