Sole Trader to Ltd Comany

jsheehy101

Hi there, if anyone could provide a basic answer that would be much appreciated!

I work as a sole trading Graphic Designer. I recently met another designer who was adamant that setting up as a Limited Company was the way to go. His argument was that his profits were tax free for the first three years, that he could avail of the corporate tax rate on any money he paid himself as dividends and that almost anything could be processed as a business expense.

I told him I wasn't so sure, that what he described was more like the UK system (where plenty of sole traders have set up as limited to pay 20% tax on the dividends they pay themselves as directors).

But obviously what he was saying was interesting. My question is was there any truth to any of it?

Aside from that, for myself – a sole trading designer looking to get in with corporates – wouldn't being a Limited company have the massive benefit of inferring legitimacy to the company and more attractive to do business with than a sole trader?

Cheers.

L.Jenkins

Setting up an LTD might provide a sense of security to those who may hire you.

The_Pretender

jsheehy101 wrote: »

His argument was that his profits were tax free for the first three years, that he could avail of the corporate tax rate on any money he paid himself as dividends and that almost anything could be processed as a business expense..

The first part is true, there is an exemption for 3 years from Corporation Tax if your taxable profits are less than €320,000. The rest of what he told you is either lies or serious ignorance. It's called corporation tax for a reason. The company avails of a corporation tax rate of 12.5% on taxable profits. Any money a director takes from the company is called drawings, and the tax side of this is usually dealt through either payroll, as executive directors will usually be employees of the company, or by their own accountant through their tax return. The directors will be expected to pay income tax, PRSI, USC. Bear in mind that as a proprietary director (a director owning 15%+ shares in the company) you will also not be entitled to the PAYE Tax Credit. It is also important to note that any expenses the company pays on your behalf will be considered as drawings and you will be taxed on it.

If your friend is only paying 12.5% tax on his drawings then he needs to run as fast as he can to an accountant or hope Revenue never audit him, as he'll be in for a serious shock when he see his full liability plus interest and penalties.

jsheehy101 wrote: »

I told him I wasn't so sure, that what he described was more like the UK system (where plenty of sole traders have set up as limited to pay 20% tax on the dividends they pay themselves as directors).

But obviously what he was saying was interesting. My question is was there any truth to any of it?

In order to expense a cost it has to be incurred wholly and exclusively for trade purposes. Remember that you need to be able to argue to Revenue that this item is necessary for you to carry out your business. If you're getting personal use of it then you will be expected to pay benefit in kind tax.

jsheehy101 wrote: »

Aside from that, for myself – a sole trading designer looking to get in with corporates – wouldn't being a Limited company have the massive benefit of inferring legitimacy to the company and more attractive to do business with than a sole trader?

Cheers.

The big bonus for a limited company is the limited liability offered. If the company was to go bust, provided you have acted honestly and responsibly then your creditors can't come after you for the debts of the company unless they are personally guaranteed. As a sole trader you are the business therefore you are liable for all debts of the business.

Also, as you've said a limited company will generally be more highly thought of than a sole trader. You will have higher costs by way of accounting fees due to the level of reporting required.

In the right circumstances a limited company can offer more benefits than being a sole trader, however it's something you seriously need to talk to a tax advisor about to evaluate how it will effect your own situation.

Amik

Glad I found this thread! I've moving out of a permanent role into a 6-month contract in the IT sector. I've never worked as a contractor before.

Like jsheehy101 above, I can do contract work as a sole trader?

The agency hiring me (through a consultancy agreement) sent me links to companies that offer Umbrella services. I understand the concept behind them, but I'm comfortable with an accountant doing my taxes as a sole trader.

Loughc

Amik wrote: »

Glad I found this thread! I've moving out of a permanent role into a 6-month contract in the IT sector. I've never worked as a contractor before.

Like jsheehy101 above, I can do contract work as a sole trader?

The agency hiring me (through a consultancy agreement) sent me links to companies that offer Umbrella services. I understand the concept behind them, but I'm comfortable with an accountant doing my taxes as a sole trader.

Yes you can do contract work as a sole trader.

thegolfer

There is a three year corporation tax exemption for new entities, however the trade cannot be carried on by a previous entity.

In this case it is unlikely that you could avail of the CT exemption as you have already been trading as a sole trader, and then incorporating.

http://www.revenue.ie/en/starting-a-business/initiatives-for-startup-businesses-and-smes/tax-relief-for-new-startup-companies/index.aspx

If it was a fresh, brand new venture then you could avail of the CT exemption.

You can operate as a contractor and work through an umbrella company being paid as director.

Most companies will not engage directly with contractors, more so wishing to have an intermediary in the middle, a company or umbrella company, in a round about was safeguarding themselves from potential "employee" claims.

However there are changes coming down the line in this area I believe.

BarryD2

The_Pretender wrote: »

Also, as you've said a limited company will generally be more highly thought of than a sole trader.

This does seem to be a common perception but I've never quite understood the logic behind it. As a sole trader of 20+ years, I've had the experience (thankfully not too often) of the letter in the post advising that one of my customers (a Limited Company) is closing and inviting me to a meeting of creditors. Needless to say, I end up writing off these debts as there is very little hope of recovering any value of outstanding invoices - the Revenue and Banks etc all get their spake in first.

So logically from my POV, I'd rather deal with sole traders who can't run from their debts as easily. Giving credit to a Ltd company is a riskier prospect. That's not to say that a sole trader going bust will be able to honour their debts but at least in principle they are liable. They can't just shut up shop and sail off into the sunset quite so readily. I prefer the integrity of dealing with other sole traders where possible.

Re the OP, I too have thought of the move but given the size of turnover and accounting factors, it just seems a lot simpler to operate as a sole trader.