Should I choose to operate as a sole-trader business or a company?
If you’re about to start your own business, you’ll also need to decide on its structure. Perhaps you’re wondering whether it’s better to operate as a sole trader or a company? Or maybe you’re still unsure whether you’re making the right choice? We’ll go over the main benefits and drawbacks of being a sole trader or a company so that you know enough to take the plunge.
What is a sole-trader business?
The sole trader is the simplest business form, where your company does not constitute a separate legal entity but instead is a ‘natural person’ that, legally speaking, corresponds to you as a private individual. This comes with benefits and drawbacks.
Five key benefits of the sole-trader business
- Your accounting and administration are relatively straightforward
- The profits you make are immediately available as wages
- You can easily (and cheaply) set up and end your sole-trader business
- You don't have to contribute any starting capital
- You can make your own decisions
Some drawbacks worth considering
- You declare all your income in your personal income tax return (i.e. taxed at a higher rate than corporation tax)
- You have less scope for optimising tax payments
- You are personally liable if your sole-trader business has debts
- You have limited possibilities to arrange succession and transfer
When is the sole-trader business a good choice?
- When you want to start your own business but want to limit the financial risks involved
- When you want a straightforward way to get started without having too many commitments
- When you want to operate on your own without the involvement of any partners (hiring staff is possible)
What is a company?
Unlike the sole-trader business, the company constitutes a separate entity in the form of a ‘legal person’ and therefore does not correspond to you as a ‘natural person’. As the name suggests, you can set up a company together with two or more other persons (partners). The arrangements are then set out in the articles of association.
Five key benefits of the company
- The income you generate is taxed separately and you can optimise tax relief on your personal income
- You can keep the profits in your company and invest them in your business
- Your liability as a shareholder is limited with most types of company
- You can bring in financial partners who’ll put their weight behind your business
- Succession and transfer are easier to arrange
Some drawbacks worth considering
- Depending on the form chosen, setting up a company can cost you between 700 euros and 1 500 euros
- There is much to consider when setting up a company, including drafting the articles of association and filing them with the Commercial Court
- Your company needs to keep more complex accounting records and that requires some accounting knowledge
- Dissolving your company is not exactly straightforward, so you cannot ‘try’ without running up considerable costs
When is the company a good choice?
- When you expect to make a sound profit and want to use it to grow your business
- When you want to run your business with partners
- When you want to run less risk of losing personal capital in the event of bankruptcy (the risk varies depending on the company form)
