How to Switch from a Sole Trader to a Limited Company

By Register a Company in Ireland, 3rd Jan 2018

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When starting out, many entrepreneurs choose to operate as a Sole Trader as opposed to forming a Limited Liability Company. Operating as a Sole Trader seems a natural choice because it is easy to set up, all you need to do is register a business name with the CRO and register for income tax with Revenue. However, as their business grows many Sole Traders find that they don’t have the same advantages as a Limited Company. For example, they don’t have exclusive rights over the registered business name. When operating as Sole Trader an individual is liable for the business debts and should the business fail personal assets could be seized to pay off creditors. Similarly, Limited Partnerships consist of at least one general partner and one limited partner so the general partner is liable.

When Should a Sole Trader Switch to a Limited Company Structure? 

There are many benefits to operating as a Limited Company, but the main draw is Ireland’s the low corporate tax rate of 12.5%. It is possible to convert from a Sole Trader or Limited Partnership to a Limited Company at any time but it advisable to convert before the net profits of the business exceeds the standard income tax cut-off limit. As per Budget 2018 in the Republic of Ireland, the standard income tax cut-off limit will increase from €33,800 to €34,550 for single individuals, and from €42,800 to €43,550 for married one-earner couples. Under this limit Sole Traders generally pay between 0-20% taxes on their business income; any income exceeding this limit is taxed at the rate of 40%.

What are the Benefits of a Limited Liability Company?

A Limited Company has limited liability, should the business become insolvent, the owners are only liable to pay the unpaid capital on their shares. A company is a separate legal entity to the individuals that own and operate the business, so the owners are protected if legal action is ever taken against the company. Long-term benefits can be provided to directors and shareholders as well through company pensions, pension schemes are an effective way to reduce taxes when making larger contributions.

When operating a Limited Company, you will have the ability to raise finances through the issue of shares. Investors can be issued shares in exchange for funding, this is mutually beneficial because investors are more likely invest in a limited company structure and it is in their best interest that the company succeeds. Alternatively, if you do wish to seek funding from a financial institution, a limited company is more likely to be approved because a bank can secure their investment against the assets of the business.

How can a Sole Trader Switch to a Limited Liability Company?

The process of switching from a Sole trader to a Limited liability company is much the same as forming a new company. First you need to choose a company name and the appropriate company type, the most popular company type for business ventures in Ireland is a Private Company Limited by Shares (LTD). The requirement of Irish companies is that they must appoint at least one EEA resident director and separate secretary; at least two people are required but you can have more Directors if you wish. To Incorporate, a new company application will need to be filed with the CRO. Although it is possible to form a company by yourself we strongly suggest that you consult a licensed company formation agent to ensure the company is set up correctly. Please contact Register a Company in Ireland today to learn more about our comprehensive start-up package which includes a certificate of incorporation, members certificates and a company seal.

Please note: when the company starts trading it will also need to register for Corporation Tax and Vat with the Revenue Commissioners office.

If you would like more information, please do not hesitate to contact us on +353 16874519 or you can submit a request using our contact form.