The short version
Sole trader is simpler, cheaper to run, and taxed on everything you earn whether you spend it or not. A limited company costs more to operate and carries real filing obligations, but it separates you legally from the business and lets you leave profit inside it at 12.5% rather than drawing it at marginal rates.
| Sole trader | Limited company | |
|---|---|---|
| Legal status | You and the business are the same person | A separate legal entity |
| Liability | Unlimited — personal assets are exposed | Generally limited to share capital |
| Tax on profits | Income tax, USC and PRSI, up to about 52% | 12.5% corporation tax on trading profits |
| Tax on money taken out | Not applicable — all profit is taxed as yours | Salary taxed under PAYE, or dividends taxed at marginal rates |
| Annual filings | Form 11 income tax return | CT1, B1 annual return, financial statements to the CRO |
| Public disclosure | None | Accounts and officer details on the public register |
| Set-up | Register with Revenue; register a business name if trading under one | Incorporate with the CRO, typically in a few working days |
| Typical running cost | Lower | Higher — expect several times the accountancy fee |
The tax question, honestly
The 12.5% figure gets quoted constantly and misleads people. It is the rate the company pays on trading profits it retains. It is not the rate you pay on money you actually take home.
If you draw the entire profit out as salary, you pay broadly the same as a sole trader would, because salary is taxed under PAYE at the same rates. The company saves you nothing in that scenario, and you have added the cost of running it.
The company advantage is a deferral on profit you do not need. If you spend everything you earn, incorporating is unlikely to reduce your tax bill.
Where it does work is when the business generates more than you need to live on. The surplus stays in the company at 12.5% instead of being taxed at your marginal rate immediately, and you decide later how and when to extract it — as salary in a leaner year, as pension contributions, or on a sale of the business.
The close company surcharge
Retaining profit is not unlimited. Most owner-managed Irish companies are close companies, and undistributed investment and rental income can attract a surcharge if it is not distributed within eighteen months of the accounting period end. Trading profits are not caught by the same charge, but professional service companies have their own surcharge rules. This is one of the areas where generic advice goes wrong and a look at your specific numbers does not.
Liability is not a footnote
As a sole trader you are the business. A claim against the business is a claim against your house, your car and your savings. There is no separation to argue about.
A company limits that exposure to what you have put in, with real exceptions. Directors who trade recklessly, who fail to keep proper books, or who continue trading while insolvent can be held personally liable. And banks and landlords routinely require personal guarantees from directors of small companies, which puts the exposure straight back where it started.
- Work with meaningful professional risk, physical risk or contractual exposure points towards a company.
- A business with employees points towards a company.
- A low-risk service business with no staff and no borrowing has much less to gain from the liability shield.
What each one actually costs to run
A sole trader files one Form 11 a year. That is the whole annual compliance cycle, plus VAT and payroll if they apply.
A limited company files a CT1 corporation tax return, a B1 annual return with the Companies Registration Office, and financial statements prepared under an accounting framework and filed on the public record. Directors have statutory duties. There is a company secretary. There are registers to maintain, and a beneficial ownership filing to keep current.
None of that is difficult with an accountant, but it is not free, and it is not optional. The compliance cost of a company is the price of the structure, and it does not scale down for a business that turns out smaller than expected.
Credibility, and who you sell to
Some markets do not care. Trades, local services and most consumer businesses are entirely comfortable with a sole trader.
Others effectively require a company. Many large corporates and public bodies will not engage an individual contractor directly because of employment status risk, and agencies frequently require contractors to operate through a limited company. In IT, pharma, engineering and financial services contracting in Ireland, the question of structure is often settled by the client before you get a say in it.
So where is the crossover?
There is no single threshold, and anyone quoting one precisely is guessing. What actually determines it is the gap between what the business earns and what you need to withdraw.
- Work out your realistic annual profit before you pay yourself.
- Work out what you genuinely need to draw to live, after tax.
- The difference is the profit that could stay in a company at 12.5%.
- Compare the tax saved on that retained amount against the extra annual cost of running the company.
If the retained surplus is small, stay a sole trader. If it is substantial and recurring, the company pays for itself and then some. If your reason is liability rather than tax, the arithmetic matters less than the protection.