Sole Trader to Company?

Disclaimer: This is a general non technical summary of incorporating a business. You should always seek professional advice when tax planning, as different circumstances give rise to different issues to be addressed.

For people who are self employed, and where profit from the business is significantly higher than personal drawings each year, it is advisable to review whether it is better to incorporate your business.

The benefits of using a company structure for your business are mainly lower profit taxes and limited liability. In this article I will only deal with the lower profit taxes.

Ireland’s corporation tax rates remains at 12.5%, although this has received a lot of media coverage in the last year, where some European countries are raising the issue of Irelands low corporation tax rate. Current government policy is to keep the 12.5% corporation tax rate. As with any taxes, this may or may not change in future years.

This corporation tax rate compares very favourably with current income tax rates for sole traders and partnerships on profits, where income tax of 20% or 41%, universal social charge (USC) of 7%, and PRSI of 4% all currently apply. These combine to over 50% of taxes on profits at the marginal rate where business profits exceed standard rate tax bands. The current corporation tax rate of 12.5% is not much higher than the combined USC and PRSI rates, before we even consider income tax of 20% or 41%. For this reason a lot of businesses are now incorporating their business.

The process is not a complicated one. The sole trade or partnership must be ceased and cessation accounts prepared for the final year, and the business de-registered for all taxes. A revision of profits may arise in certain circumstances and this would need to be considered.

A new company can be set up relatively inexpensively, and 2 directors must be appointed to the company board. The directors are responsible to ensure that the company complies with company law and other law, and can be held personally liable for the debts of the company in certain circumstances. The directors will open a new company bank account, register the company for corporation tax and employer taxes / Vat if required, and register all employees as employees of the company. The company will be given a new tax number to be used on sales invoices and other documentation. The business will continue to trade as normal and the business name can be transferred to the company.The company will be given a new tax number to be used on sales invoices and other documentation.


After 6 months a B1 must be submitted to the Companies office. The directors are required to submit an annual B1 with accompanying company accounts to the Companies office by the annual return date that each company is assigned. Depending on the case, most business can file the company accounts without the need for an annual audit.

Normally the business person will become one of the new directors of the company, and must continue to file an income tax return to include their new company wage. The directors will be paid an agreed wage from the company. In addition the assets of the business can be transferred from the business person to the company at an agreed price.

Worked Example
John operates his business through a sole trade but decides to trade through a company for next year. His profits are €90000 per annum and he needs €400 per week net for living expenses. His wife works and uses her full tax credits and tax bands.

	Sole Trade	Company
Business Profit	€90000	€90000
Income Tax, USC & PRSI on Profit	€38262
Income Tax, USC & PRSI on Wages (26500 gross = €400 pw net)		€5883
Corporation Tax on Balance		€7938
Total Tax	€38262	€13821
Total Tax Savings Per Annum via Company		€24441

In addition Start up businesses trading through a company can avail of 0% corporation tax for a number of years. This will not apply to an existing business transferring to a company, but is available to new business start ups.

Excess profits not withdrawn from the company through director’s wages or dividends are taxed at 12.5% and will remain in the company. These excess funds cannot be withdrawn from the company for use by the directors, without applying payroll or other income taxes, and this defeat’s the purpose of setting up the company in the first place. Therefore after a number of years a company may have built up a fund of money, which can be used to invest further in the business to buy equipment, stock, etc without the need to borrow. It can also be distributed to the owners or directors in a tax efficient manner. Depending on the circumstances of the case, there are a number of other considerations including VAT, CGT, tax planning issues, service company surcharge, employees transferring to the company, how the company will pay for the assets, and other matters. These issues would have to be dealt on a case by case basis, as there is no point in going into the detail of each scenario in this article..