My Experience Trying Both Approaches As A Solopreneur And Consultant
When starting a solo or small-scale business, a crucial early decision is choosing the legal structure that best suits your needs. In 2022, I evaluated the pros and cons of operating as a sole trader versus forming a limited company in Ireland. Initially, I set up a sole trader business in 2022 and transitioned to a limited liability company in 2023. Here’s what I learned from this process.
This article responds to a frequently asked question:
Q: Did you set up a limited company or operate as a sole trader? Why?
I spend 33 minutes writing this blog. You need 3 minutes to read this.
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My 3 Priorities In 2022
1 - Ease and Cost of Setup
I wanted a structure that was easy to establish and run without significant upfront costs.
2 - Tax Savings
I wanted taxes to apply on only profits, not entire revenue because I anticipated substantial business expenses.
3 - Legal Protection
I considered the implications of personal liability and how each structure would protect or expose me legally.
Choosing Sole Trader In 2022
1 - Simplicity
Operating as a sole trader seemed straightforward, with minimal paperwork and fewer administrative requirements.
Easy to setup
Cheaper to setup
Cheaper admin per year
Easier to shut down
2 - Flexibility
I thought it would be easy to transition to a limited company if needed. However, by 2023, I realized I had misunderstood this. It isn’t simple or difficult. It is impossible to convert a sole trader to a Limited entity. Setting up a Limited entity requires a new setup.
3 - Short-Term Outlook
At the time, I was unsure if this would be a long-term venture or just a three-month experiment. I wanted something that allowed me to start quickly and didn’t limit future growth. If I chose to stop my business after a few months, I wanted an option that was easy to dissolve.
Taxation Experience As A Sole Trader in 2023
Good: Profit-Based Taxation
For example, earning €20,000 with €15,000 in expenses meant I was taxed only on the €5,000 profit.
Bad: Reinvestment Over Personal Gain
I reinvested all profits into the business and didn’t draw a personal salary.
My profits were taxed as personal income at a high tax rate because our household income (including my wife's earnings) placed us in the higher tax bracket. However, we didn’t use any of these profits for household expenses.
Business Growth And New Challenges In 2023
1 - Launching a Software Product
I launched a product that managed personally identifiable information (PII), introducing new legal requirements.
2 - Expanding the Team
I hired a part-time data science intern and planned to onboard marketing interns.
These changes increased potential legal risks. For example, if a user or employee filed a lawsuit, I would be personally liable, risking my wife’s and my savings and potentially our house.
I Set Up A Limited Company In 2023
In 2023, I realized there was no way to convert a sole trader business into a limited company.
This became a concern due to liability. As a sole trader, my personal assets were at risk if employees or customers took legal action.
So, I established a limited company to mitigate these risks.
However, the transition was time-consuming. I lost productive hours transferring my accounts to the limited company and closing the sole trader business.
Accounting Challenges For A Limited Company in 2024
I struggled to find the right accountant. My selection criteria were: I needed someone affordable, flexible, and easy to work with.
Many were either too expensive or inflexible.
Affordability: With limited profits, I couldn't justify spending a significant portion of my earnings on accounting fees.
Flexibility: Most accountants recommended standard tools like Xero or Sage, but I used Zoho Books, which came bundled with Zoho CRM and Zoho Expenses at no extra cost. Switching to Xero or Sage would have increased my expenses without offering additional benefits.
Reflections In 2024 And Advice For My Past Self
Looking back, I should have started with a limited company from the beginning.
Why? My long-term goal has always been to run a company for decades. Starting with the right structure would have aligned better with my aspirations.
While practicality initially led me to operate as a sole trader, a limited company would have been a better fit—even if the business generated minimal income. The structure supports entrepreneurial dreams and long-term growth far more effectively.
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