Reasons for a starting business to register as a LLC VS Sole Proprietorship

dgallagher_73

Apologies if this is not the correct forum to ask this question.

I'm just wondering if someone was to set up a business of some kind what would be the advantages or disadvantages of setting it up as either a sole proprietorship or an LLC?
My understanding is that a limited business will protect your personal assets in case you are sued in some way whereas you cannot avail of this kind of protection via a sole proprietorship?

That makes me wonder why doesn't everyone who sets up a business not just set them up as an LLC? Why would they choose sole proprietorship over LLC?

Is one reason for people being put off setting up as an LLC because you need one person to act as a director and another person to act as a secretary? I'd imagine this would be a hindrance to a lone person setting up a business.

meijin

dgallagher_73 wrote: »

Is one reason for people being put off setting up as an LLC because you need one person to act as a director and another person to act as a secretary? I'd imagine this would be a hindrance to a lone person setting up a business.

you can actually get an accountant to act as a secretary

but in general, for Ltd company, there is more paperwork and higher costs related to that

dgallagher_73

meijin wrote: »

you can actually get an accountant to act as a secretary

but in general, for Ltd company, there is more paperwork and higher costs related to that

Oh right I didn't know that. Good to know.

I'm just trying to understand at what point would a sole trader want to change their business to a limited company?

From reading online it seems that a business would want to change to a limited company if the business has a turnover of over 50,000 and is growing.
The reasoning for this is because you can avail of the rate of Corporation Tax(12.5 %). I'm trying to wrap my head around this reasoning.



If my business had a turnover of 100,000 for the year of 2020 lets say and my business is a limited company I would be taxed 12.5% on that 100 grand.
So 12,500 Euros would go to Revenue and the remaining 87,500 Euros would go into the companies bank account.

Whereas if my business had been a sole proprietorship instead of a limited company I would be taxed the standard rate of income tax on that 100,000 Euros? Therefore I would have to pay Revenue significantly more money in this case than I would had I set up the business as a limited company.

Is my thinking correct on this?

relevanc

dgallagher_73 wrote: »

Is my thinking correct on this?

Yes!

The company pays 12.5% (let’s ignore close company surcharges for now)
But you are not the company.

When you want to take money out of the company you will be taxed.

dgallagher_73

relevanc wrote: »

Yes!

The company pays 12.5% (let’s ignore close company surcharges for now)
But you are not the company.

When you want to take money out of the company you will be taxed.

Okay cool.

I was wondering is it at my discretion as the director of the company to pay myself from the companies bank account? Are there any rules to this?

Gloomtastic!

dgallagher_73 wrote: »

Oh right I didn't know that. Good to know.

I'm just trying to understand at what point would a sole trader want to change their business to a limited company?

From reading online it seems that a business would want to change to a limited company if the business has a turnover of over 50,000 and is growing.
The reasoning for this is because you can avail of the rate of Corporation Tax(12.5 %). I'm trying to wrap my head around this reasoning.



If my business had a turnover of 100,000 for the year of 2020 lets say and my business is a limited company I would be taxed 12.5% on that 100 grand.
So 12,500 Euros would go to Revenue and the remaining 87,500 Euros would go into the companies bank account.

Whereas if my business had been a sole proprietorship instead of a limited company I would be taxed the standard rate of income tax on that 100,000 Euros? Therefore I would have to pay Revenue significantly more money in this case than I would had I set up the business as a limited company.

Is my thinking correct on this?

No. You are taxed on the profits of the company not the turnover (they have another tax for turnover called VAT). Death and taxes!:mad:

dgallagher_73

Gloomtastic! wrote: »

No. You are taxed on the profits of the company not the turnover (they have another tax for turnover called VAT). Death and taxes!:mad:

I meant to say "If my business had a net profit of 100,000"....

I understand how VAT works...it's a sales tax.

Also VAT only applies to retail outlets I believe? If I had a business selling iPhone cases to phone shops I wouldn't have to worry about adding VAT to the price I am selling the cases to the shops themselves? The shops are the ones who have to add VAT to price of the cases that they are selling to customers? Am I wrong to think this?

If I had a business selling a specific kind of software on a website would I have to worry about adding VAT to the sale of each digital copy of the software? I assume I would if I owned the website? The website would be considered a retail outlet in this case?

Gloomtastic!

dgallagher_73 wrote: »

I meant to say "If my business had a net profit of 100,000"....

I understand how VAT works...it's a sales tax.

Also VAT only applies to retail outlets I believe? If I had a business selling iPhone cases to phone shops I wouldn't have to worry about adding VAT to the price I am selling the cases to the shops themselves? The shops are the ones who have to add VAT to price of the cases that they are selling to customers? Am I wrong to think this?

If I had a business selling a specific kind of software on a website would I have to worry about adding VAT to the sale of each digital copy of the software? I assume I would if I owned the website? The website would be considered a retail outlet in this case?

VAT is a sales tax for all businesses - service or retail.

https://www.revenue.ie/en/vat/vat-registration/who-should-register-for-vat/what-are-the-vat-thresholds.aspx#:~:text=The%20principal%20thresholds%20are%20as,other%20European%20Union%20Member%20States.

The principal thresholds are as follows:

€37,500 in the case of persons supplying services only.
€35,000 for taxable persons making mail-order or distance sales into the State.
€41,000 for persons making acquisitions from other European Union Member States.
€75,000 for persons supplying goods.
€75,000 for persons supplying both goods and services where 90% or more of the turnover is from the supplies of goods. However, while all goods and services are part of the turnover, the 90% does not necessarily include all goods sold.

Gloomtastic!

I would recommend that you look at a Start Your Own Business course with your Local Enterprise Office.

https://www.localenterprise.ie/Discover-Business-Supports/Training-Programmes/Start-Your-Own-Business-Programme/

The taxman does not take ignorance as an excuse.

dgallagher_73

Gloomtastic! wrote: »

VAT is a sales tax for all businesses - service or retail.

https://www.revenue.ie/en/vat/vat-registration/who-should-register-for-vat/what-are-the-vat-thresholds.aspx#:~:text=The%20principal%20thresholds%20are%20as,other%20European%20Union%20Member%20States.

The principal thresholds are as follows:

€37,500 in the case of persons supplying services only.
€35,000 for taxable persons making mail-order or distance sales into the State.
€41,000 for persons making acquisitions from other European Union Member States.
€75,000 for persons supplying goods.
€75,000 for persons supplying both goods and services where 90% or more of the turnover is from the supplies of goods. However, while all goods and services are part of the turnover, the 90% does not necessarily include all goods sold.

By threshold do you mean I have to earn over those amounts in order to be liable for VAT? So if I sold software on a website and I earn more than 37,500 Euros from selling the software, I would be liable for VAT after I reach the 37,500 figure?

lawred2

dgallagher_73 wrote: »

By threshold do you mean I have to earn over those amounts in order to be liable for VAT?

Earn as in profit?

No.

A software contractor would have to register for vat if they invoiced for amounts greater than 37,500 in the year.

What they ultimately pocket is not relevant.

dgallagher_73

lawred2 wrote: »

Earn as in profit?

No.

A software contractor would have to register for vat if they invoiced for amounts greater than 37,500 in the year.

What they ultimately pocket is not relevant.

I don't understand what this sentence means: "A software contractor would have to register for vat ID they invoiced for amounts greater than 37,500 in the year."
Are you saying that if the software maker has a turnover of 37,500 within a year then at that stage they have to register for VAT and add VAT to the price of the software that they are selling? I don't understand...

Can you explain in simple terms what you are trying to say to me? Apologies if I'm a bit slow!

lawred2

dgallagher_73 wrote: »

I don't understand what this sentence means: "A software contractor would have to register for vat ID they invoiced for amounts greater than 37,500 in the year."
Are you saying that if the software maker has a turnover of 37,500 within a year then at that stage they have to register for VAT and add VAT to the price of the software that they are selling? I don't understand...

Can you explain in simple terms what you are trying to say to me? Apologies if I'm a bit slow!

It's all there in the revenue link already posted by someone else..

It's turnover based not profit based

Axwell

If your business makes more than 37,500..then your LTD company (or LLC as you are referring to it) needs to register for and pay VAT. It has nothing to do with your wages or net profits...once your sales go over 37,500...you need to register for VAT.

Yes to answer your question, at that point you are adding VAT to your sales price..so depending on your business and expectations and if you can claim VAT against other items it may make sense to register from day one.

dgallagher_73

Axwell wrote: »

If your business makes more than 37,500..then your LTD company (or LLC as you are referring to it) needs to register for and pay VAT. It has nothing to do with your wages or net profits...once your sales go over 37,500...you need to register for VAT.

Yes to answer your question, at that point you are adding VAT to your sales price..so depending on your business and expectations and if you can claim VAT against other items it may make sense to register from day one.

Okay I understand what you mean regarding VAT.

Okay so lets take two examples of an online software business that is owned and run by one person that earned 100,000 Euros in profit for the year 2020.
The first example would be in the case that the business is a sole proprietorship and the second example would be in the case where the business is a limited company.


In the sole proprietorship example, the business owner's net income after being taxed on that 100 grand would be 61,353 Euros for the year of 2020 based on the Deloitte income tax calculator that is found here: http://services.deloitte.ie/Results.aspx

In the case where the business was a limited company they would be charge a 12.5% corporation tax on that 100,000 Euros profit. So 12,500 Euros would go to Revenue and the remaining 87,500 Euros would go into the companies bank account.

However if the business owner wants to pay themselves that entire 100,000 Euros of profit for themselves by transferring that 87,500 Euros from the company's account into their personal account they would be taxed in the exact same way that a sole proprietor would be upon receiving 87,500 Euros? So after being taxed on that 87,500 Euros they would end up with a net annual income of 55,354 Euros according to the Deloitte income tax calculator: http://services.deloitte.ie/Results.aspx

So not only has the business paid 12,500 in corporation tax but when the business owner wants to pay themselves the entirety of the money earned after paying corporation tax (87,500) they now have to pay normal income tax on that 87.5 grand leaving them with 55,354 Euros.

Am I wrong or would it make way more sense to be a sole proprietor in this scenario?