Benefits of doing business with a ltd company vs sole trader?

smash

For a limited company, is there an advantage in doing business with another ltd company over a VAT registered sole trader?

Example:

Company A needs to outsource work so they approach Person A to do the work at x rate, but they will only deal with Ltd companies and not sole traders.

Person A can be a sole trader and registered for VAT, but now has to set up Company B as a ltd company with single director.

Company B, which is essentially just Person A, now has to pay corporation tax so the agreed rate isn't exactly as good as it first appeared.

I've come across this scenario in a few different industries from IT to tradesmen, but just wondering what the advantages are of doing business this way?

professore

You only have to pay corporation tax on profits. Say you have €5K left over at the end of the year after paying costs, taxes, salaries etc. If you wish, you can just pay this to yourself as a Christmas bonus and pay PRSI, USC etc on it, thus reducing your profits to zero. Alternatively, you can keep it in the company for next year and pay 12.5% on it, so when you're stuck you can use it as a buffer. Or stick it in a pension fund.

Also limited liability, if someone sues you they can't take your house.

The disadvantage is additional regulations and paperwork.

DISCLAIMER: I'm not an accountant, this is for informational purposes only.

smash

professore wrote: »

Also limited liability, if someone sues you they can't take your house.

But I'm talking about the advantages to Company A. They're a ltd company anyway. But they will only do business with Person A if he sets up Company B... What's the advantage to them to only do business with another Ltd company?

jimmii

smash wrote: »

But I'm talking about the advantages to Company A. They're a ltd company anyway. But they will only do business with Person A if he sets up Company B... What's the advantage to them to only do business with another Ltd company?

I guess they know if things go wrong and they have to go after the company then its less likely they are going to be bankrupting someone. Also its likely assumed that if they are an LTD they are a bigger company than the Sole Trader which could possibly be a factor.

I'm just speculating. Personally it wouldn't be a factor when choosing a company to outsource to.

smash

jimmii wrote: »

I guess they know if things go wrong and they have to go after the company then its less likely they are going to be bankrupting someone. Also its likely assumed that if they are an LTD they are a bigger company than the Sole Trader which could possibly be a factor.

I'm just speculating. Personally it wouldn't be a factor when choosing a company to outsource to.

I wouldn't consider it a factor in who I do business with either, but I find it strange that it's a pre-requisite now for some. The assumption of a bigger company doesn't make sense when they already know it will be a ltd company with a single employee.

jimmii

smash wrote: »

I wouldn't consider it a factor in who I do business with either, but I find it strange that it's a pre-requisite now for some. The assumption of a bigger company doesn't make sense when they already know it will be a ltd company with a single employee.

It is bizarre but I guess if it is a large company outsourcing the work then they just have this policies in place that don't allow for these sort of situations as it saves on someone having to make a judgement call.

Graham

jimmii wrote: »

It is bizarre but I guess if it is a large company outsourcing the work then they just have this policies in place that don't allow for these sort of situations as it saves on someone having to make a judgement call.

I'd guess it's partly to protect against claims that a self-employed subcontractor was actually an employee.

jimmii

Graham wrote: »

I'd guess it's partly to protect against claims that a self-employed subcontractor was actually an employee.

Possibly. But the set up would be the same no matter what the company formation was its one guy doing the work no matter whether its an ST or an LTD and doesn't change how many clients they have either. It would be one safe guard to use against it being a possibility though too.

pedroeibar1

One issue many SME’s often overlook is the reliability of their suppliers. If you are going to depend on a supply of product/service from somebody, you should check them out, ascertaining how long they have been in business, assets/liabilities, credit reputation, etc. You cannot assess the financial viability of an individual as the information is not publicly available. Imagine finding out now that the programme designed to handle your Christmas “boost” in sales is not going to be delivered until January.

A Ltd company indicates that a business has achieved a critical mass and is an indicator of size/professionalism.

I’d also go along with Graham’s suggestion above that a self-employed subcontractor could be construed as an employee.

jimmii

pedroeibar1 wrote: »

One issue many SME’s often overlook is the reliability of their suppliers. If you are going to depend on a supply of product/service from somebody, you should check them out, ascertaining how long they have been in business, assets/liabilities, credit reputation, etc. You cannot assess the financial viability of an individual as the information is not publicly available. Imagine finding out now that the programme designed to handle your Christmas “boost” in sales is not going to be delivered until January.

A Ltd company indicates that a business has achieved a critical mass and is an indicator of size/professionalism.

I’d also go along with Graham’s suggestion above that a self-employed subcontractor could be construed as an employee.

We ran into this not so long ago contacted them to see where our order was took them a couple of days to get back but they found it under some shopping. You wouldn't get that so often with an LTD supplier!

dbran

Hi

With a limited company it is a matter of public records as to who owns and controls it. This is a big issue as often with a sole trader type operation it is impossible to know whether you are dealing with the business owner or just another one of their employees or sales person. So if things do go wrong it is difficult to get after the top person to get it fixed. "Nothing to do with me. I just worked with Mr. Big for a few months".

As pedroeibar1 also mentioned it is easy to find out whether a company has a track record or is well established. You can get a look at some financial information if they file accounts. You can also see if they have had any number of companies and if they went bust or were abandoned or if they are trading successfully.

Best of luck

dbran

smash

Thanks @dbran. That all really relates to contracting an existing company though, not approaching someone to contract and then stating that they'll need to set up a ltd company before they engage in business with them.

It's an odd one and I've heard of it a few times now. I just don't see the benefit of it really.

Graham

Insisting on a Limited company has been common practice in the IT contracting market for 10+ years, particularly where an agency is involved.

It's probably worth pointing out that it would be unusual for a single person limited company to retain any profits so corporation tax is unlikely to be an issue. Time to talk to your accountant.

dbran

smash wrote: »

Thanks @dbran. That all really relates to contracting an existing company though, not approaching someone to contract and then stating that they'll need to set up a ltd company before they engage in business with them.

It's an odd one and I've heard of it a few times now. I just don't see the benefit of it really.

That would be mainly to get out of the contractors being construed as employees. In that case you would have all sorts of little animals being unleashed such as holiday pay, sick pay, unfair dismissal not to mention the additonal payent of employers prsi.

As Graham said, for companies of this type there is usually no charge to corporation tax as all of the profits need to be distributed as a salary for tax reasons. The revenue have hit this sector really hard in the last little while and you would do well to get some professional advise with the set up and ongoing issues.

Best of luck

dbran

EGavigan

dbran wrote: »

As Graham said, for companies of this type there is usually no charge to corporation tax as all of the profits need to be distributed as a salary for tax reasons. The revenue have hit this sector really hard in the last little while and you would do well to get some professional advise with the set up and ongoing issues.

dBran - can I ask what are tax reasons which would force a company to distribute all profits? If the company makes say 50k but the person can live on 24k, can they not leave the 26k in the company and pay corp tax as was previously possible?

dbran

EGavigan wrote: »

dBran - can I ask what are tax reasons which would force a company to distribute all profits? If the company makes say 50k but the person can live on 24k, can they not leave the 26k in the company and pay corp tax as was previously possible?

Close companies of this type may be construed as providing professional services and thus would be subject to an additional corporation tax surcharge of effectively 7.5% on any such income that is not distributed to the the company's share holders as a dividend.

This surcharge serves to eliminate the benefit of leaving the money in the company because after the surcharge is paid the remaining profits still has be withdrawn from the company at some stage. This will usually mean they are subject to CGT at 33% on liquidation or worse, income tax if it is not dealt with correctly.

So it is unwise to allow the profits to build up in the company as it will result in a larger tax liability to be paid on the long run.

dbran

jetsonx

pedroeibar1 wrote: »

A Ltd company indicates that a business has achieved a critical mass and is an indicator of size/professionalism.

I nearly choked on my Jaffa cake reading this. Some of the greatest chancers I've encountered have "Ltd" companies with wifey or brother listed as co-director. A "ltd" company is not a proper indicator of size or professionalism.

dbran

Perhaps.

But it does give more of a perception that your business is in for the long hall and is a more permanent establishment then a sole trader type operation that can be opened and shut almost overnight.

But you are right, the owners could be just a pair of messers. In that case just do a search of their company on the CRO and see what rubbish they have filed.

It does not take a genius to spot the genuine business owners from the chancers and corporate hooligans.

dbran

pedroeibar1

jetsonx wrote: »

I nearly choked on my Jaffa cake reading this. Some of the greatest chancers I've encountered have "Ltd" companies with wifey or brother listed as co-director. A "ltd" company is not a proper indicator of size or professionalism.

I hope you have regained your equilibrium after dbran gave you your thump on the back. Nobody but a fool takes “Ltd” status as anything other than what it is - simply a step on the ladder, one that needs to be examined before taking the next one.

To add to dbran’s points (and others already made) sole traders are fine for very small operations, little guys providing product/services to other little guys. Move up into a bigger sphere and there is more at stake, more efficiencies (professionalism is a bit too strong a word), more rules, more credit control, quality control, forms, etc. Try to do business with a big company and you will be asked for your CRO Reg No., ISO Certification, industry mark, whatever and for your last set of accounts before they will even consider doing business with you. When you grow you will find that big companies have procedures that need to be followed, boxes to be ticked and if you cannot fulfil all that/ or at least make it easy for a credit control clerk, it is sayonara. They are not interested in a sole trader’s statement of affairs or the residual value of your car. One very very big Ltd. company I did some work for nearly lost a key overseas buyer simply because the buyer did not understand what Section 17 meant and couldn’t be ar$ed to go find out.

Another point worth mentioning is that a sole trader can make money, an income, but generally is creating nothing of value because s/he is the business and therefore there is no legal entity that can be sold. Suck on a fig roll while digesting all this, dbran might be gone to bed and I'd hate to see you choke again.:)

jetsonx

Jeepers creepers Pedro no need to be like that...

The spirit of the Entrepreneurial and Business forum on boards.ie has always been one of good natured banter and
debate...lets keep it like that.

I was merely shocked at your statement of "Ltd" companies being an indicator of "critical mass" and "size" or "professionalism". I've taken on board what you say about credibility and ultimately the "sell-ability" of a business. These
are of course important. But I do think that "Ltd" status has nothing to do with size or professionalism.

As I'm sure dbran knows the "Ltd" status can be used as an accounting / tax instrument by a one-person
business operation. Usually their spouse or sibling being listed as the co-director. I see this being used by bona fide business people. Unfortunately, I also see this trick being used by less-than-reputable business people. They set their get rick quick operation, run up the debts and then close the company. A couple of years later you see them pop up under a different guise and a different "Ltd" company. Sorry but that is just the way I see it.

btw, It would be really interesting to see the stats on the amount of "2 person" "Ltd" "companies" in the Rep of Ireland.

pedroeibar1

jetsonx wrote: »

Jeepers creepers Pedro no need to be like that...

The spirit of the Entrepreneurial and Business forum on boards.ie has always been one of good natured banter and
debate...lets keep it like that.

I was merely shocked at your statement of "Ltd" companies being an indicator of "critical mass" and "size" or "professionalism". I've taken on board what you say about credibility and ultimately the "sell-ability" of a business. These
are of course important. But I do think that "Ltd" status has nothing to do with size or professionalism.

As I'm sure dbran knows the "Ltd" status can be used as an accounting / tax instrument by a one-person
business operation. Usually their spouse or sibling being listed as the co-director. I see this being used by bona fide business people. Unfortunately, I also see this trick being used by less-than-reputable business people. They set their get rick quick operation, run up the debts and then close the company. A couple of years later you see them pop up under a different guise and a different "Ltd" company. Sorry but that is just the way I see it.

btw, It would be really interesting to see the stats on the amount of "2 person" "Ltd" "companies" in the Rep of Ireland.

Dear oh dear! You are easily shocked. If it’s OK for you to banter with your jaffa cake, you should not be upset nor should it be verboten for me to counter with a fig roll!

It's clear that the purpose of the E & B forum is to ask and receive advice. Debate is welcomed and banter too is fine and fun, but "Afterhours" is the place for nonsense. Some responses on E&B regularly are nonsense, even if meant well. Blatant errors/misinformation should be corrected as some readers do not recognize them as such.

You apparently have let your hobbyhorse get the better of fact. Years ago resurrection operators were a problem. Then, since about 2002, section 56(1) of the Company Law Enforcement Act 2001 ensured that liquidators had to complete and submit a report to the ODCE on the management/affairs of the defunct company. That has now been replaced by Sections 682 and 683 of the Companies Act 2014. Have a look at what is required here but it too might shock you.

Most people have no issues with “honest” failure. A search of the CRO or a credit report should be a basic tenet of opening an account. If thoughts of crooked directors keep you awake at night, look here

Finally, in response to your last question, there is no such entity as a “two person Ltd company” - so stats are not available. There are companies under the old Acts that have two directors and one or more shareholders, others with two or several directors and one or multiple shareholders, etc., etc. Today the 2014 Act allows for single member companies but the Co Sec must not be the single member director. A few companies with which I’m involved have one shareholder and three directors.