Sole trader or limited company: the real differences in liability, tax and paperwork

The differences at a glance

We do not give advice on which to choose. Citizens Information says to get advice from a solicitor or an accountant.

Liability: what limited liability covers

As a sole trader you are personally responsible for the business. Citizens Information puts it plainly: if the business fails, your personal assets could be used to pay its debts.

A company is a separate legal entity. The Companies Registration Office says only the company can be sued for its obligations, and a shareholder's liability, if it fails, is limited to any amount still unpaid on their shares.

That protection has a gap. A lender can ask you to stand behind the company personally. Microfinance Ireland, for example, asks the directors of a limited company to sign an indemnity, which is a commitment to repay the loan if the business cannot.

Tax: why 12.5% is not the whole story

A sole trader pays tax on the whole profit as personal income. In 2026 a single person pays income tax at 20% on the first €44,000 and 40% above that, then USC and Class S PRSI on top. On profit above €70,044 the three together come to about 52%.

A company pays corporation tax at 12.5% on trading income. Non-trading income, such as rent or investment income, is taxed at 25%.

The lower rate only applies to profit that stays in the company. Money you take out is taxed as your own income:

• Pay. Revenue says all directors' salaries and fees go through the PAYE system, so they bear income tax, USC and PRSI like any wages.
• Dividends. These come out of profit the company has already paid corporation tax on. The company withholds 25% tax, and the dividend is added to your other income and taxed at your own rate, with USC and PRSI.

Leaving profit in the company has its own rule. Revenue says most Irish companies are close companies, meaning they are controlled by five or fewer people. A close company that carries on a profession or provides professional services can face a 15% surcharge on half of the trading income it does not pay out. There is also a 20% surcharge on investment and rental income that a close company keeps.

A sole trader and an owner-director can both claim the Earned Income Tax Credit, worth up to €2,000. Our guide to the 2026 income tax, USC and PRSI rates for the self-employed has the detail.

PRSI and what you are covered for

A sole trader pays Class S PRSI. So does a director who owns or controls 50% or more of the company's shares. The Department of Social Protection classes those directors as self-employed.

For a director with less than 50%, the class is decided case by case.

Where a director pays Class S, Revenue says the company does not pay employer's PRSI on that director's earnings. Either way, Class S covers the same list of benefits, and it does not include Illness Benefit.

What each costs to run, and the paperwork

A sole trader files one income tax return a year, Form 11, by 31 October, and keeps business records for six years. There is no yearly return to the Companies Registration Office.

A company has more to do every year:

• a corporation tax return, form CT1, filed and paid within nine months of the end of its accounting period
• an annual return to the Companies Registration Office, with financial statements. The fee is €20. A late return costs €100 plus €3 a day, up to €1,200
• payroll returns to Revenue, because a company must operate PAYE on its directors' pay even with no other staff
• the director's own income tax return. Revenue says a director who owns more than 15% of the shares must file one every year

A small company can skip the audit of its accounts if it files on time. Since July 2025, a company that files its annual return late more than once in five years loses that exemption.

Accountants' fees are not published anywhere official, so get quotes for both set-ups. See the forms and fees for setting up either one.

When the question usually comes up

Nothing in the rules forces a switch at a set level of profit. These are the points where the two set-ups start to differ in practice:

• Profit passes the 40% band. Above €44,000 for a single person, each extra euro of a sole trader's profit bears 40% income tax plus USC and PRSI. In a company, profit you do not need to live on bears 12.5%.
• The risk grows. Bigger contracts, a lease, staff or borrowing all raise what you could owe personally as a sole trader.
• A relief needs a company. The corporation tax relief for a company's first five years is only for new companies. So is the refund of income tax you paid as an employee in earlier years, which depends on buying shares in your own new company.

You can start as a sole trader and form a company later. The enterprise allowances accept a sole trader, a partnership or a limited company. Choosing a structure is the first of the steps for getting a new business off the ground.

Common questions

Keep reading

• which grants are closed to sole traders, and which are not