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Starting up in business? Already in business and thinking of changing to a Limited Liability Company and don’t know if you should? Bernadette McGrory Farrell of W.O.McGrory & Co has set out below the pros and cons to help you decide. What is a sole trader? A sole trader is a business owned and controlled by one person, generally trading under his/her own name or using a registered business name. If the business owner decides not to trade under his/her own name it is necessary to register the business name with the Registrar of Business Names. There is a small fee attached to this registration but otherwise it is a very simple process.
Advantages of trading as a sole trader:
1. It is much less onerous in terms of structure and formalities to set up.
2. There is no requirement to file annual accounts other than when required as proof of income for income tax purposes.
3. Closure of the business is equally easier to effect.
Disadvantages of trading as a sole trader:
1. The owner is personally liable for all the debts of the business.
2. Because ownership rests with one person, raising capital can be more difficult. Many businesses find it necessary to become Limited Companies as they grow to facilitate further growth and development.
3. The profits of the business are considered personal income and used in the calculation of income tax liability which is taxed at higher rates than Corporation Tax for Limited Companies. What is a Limited Liability Company? A Limited Company is a separate legal entity from the people who operate and control it. The owners are shareholders in this legal entity. The Company has Directors who make decisions on behalf of the Company. The Company itself has sole responsibility for all the debts of the Company, which are restricted to the paid-up share capital of the Company, hence the term Limited Liability.
Advantages of trading as a Limited Liability Company:
1. The shareholders are only liable to lose the share capital they have invested in the company.
2. Raising Capital to fund growth and development can be easier.
3. There may be many owners of the company, and it continues to exist despite the death, retirement or resignation of the Directors.
4. The Company can make pension contributions as an expense.
Disadvantages of trading in a Limited Liability Company:
1. In practice, lenders generally seek to have personal guarantees against loans given, which reduces the benefit of limited liability.
2. Setting up a company is more expensive than trading as a sole trader.
3. Legislative requirements in making annual returns to the Companies Registration Office are more onerous. Annual Accounts must be filed with the Companies Registration Office also.
4. Company Directors are subject to extensive legal responsibilities, including being made personally liable for all the debts of the Company if they are proven to have traded recklessly.