Tax: Sole Trader vs. Ltd.

Nobrow

A beginners question regarding Tax and Sole Trader vs. Ltd. companies.

I am considering launching a startup. The question is will I be better off as a sole trader or a private limited company. I realise there are other factors when it comes to deciding between the two, but the main one I am focussing on at the moment is taxation (mostly because I dont plan on taking the company into debt so the limited liability doesnt seem a big factor).

As I understand it, if I go Ltd. company profits are charged corporation tax. If I salary myself as a director, that additionally gets the normal PAYE/PRSI treatment. I presume any dividends I take are also subject to normal income tax.

If I go sole trader, all company profits are effectively my income and so get charged in the normal income tax way.

Am I right so far?

So on the one hand I can pay 12.5% on all profits, plus the higher income tax on whatever I take out of the company, or I can just pay income tax on everything.

So the two cases are:

Tax1 = Profit * 12.5 + Pay * IncomeTax (Ltd. Company)
Tax2 = Profit * IncomeTax (Sole Trader)

And in order for the Ltd. to be preferable,

Tax1 < Tax2

, which implies

Pay < Profit * (IncomeTax - 12.5) / IncomeTax

(ignoring the complication of tax credits).

I.e., if I were to not take a salary, but instead take monthly dividends of less than Profit * (IncomeTax - 12.5) / IncomeTax, I would be better off as a private limited company.

Does this reasoning seem sound?

is_that_so

Do you have any idea how much income you think you might generate?

Being a limited company also carries with it a requirement to submit annual audited accounts to the CRO.

An advantage of being limited is being able to make stakes of the company available to outside parties.

Nobrow

Not much, not in the short term anyway. At my most optimistic I wouldnt hope for more than 10k turnover in the first year.

I think I remember reading that audited accounts are only required for 40k+ or some similar figure, so I guess Id be spared the hassle/expense for the first while anyway.


Id also like to tack on another small question. This is just a general wonderingment ... we all like to work out ways to beat the system.

Suppose Im Ltd. and the day before the end of the accounting period the co. is 1k in profit. If I do nothing Ill pay 12.5% corp. tax on that. But if I ordered 1k worth of stock, so that the co. has zero profit at the end of the accounting period, does that mean I avoid tax? What if I then cancel the order the day after the start of the new accounting period. Ive still got a full E1000, no? Is this a legitimate way of avoiding tax?

is_that_so

On the basis of the projected income I would be inclined to start out as a sole trader. You may not make an operating profit in the first year anyway. You can offset a lot of expenses against tax, as well as operating losses into subsequent years.

If you were the director of a limited company you would probably end up paying PAYE anyway.

As regards your query,my guess, seeing as I am not an accountant , is that the cancellation would probably show up in the following year's accounts.

Just a comment on tax avoidance/evasion.

Accountants tend to discourage people attracting the attention of Revenue tax audits.

information

is_that_so wrote:

Being a limited company also carries with it a requirement to submit annual audited accounts to the CRO.

the exemption limit is 1.5million

Profit in the company belongs to the company, so you have to take it out as a salary or dividends