Article source :
http://www.startingabusinessinireland.com/Article author: Imelda Prendergast, ATIIPartner, OSK Small Business Support
So you have decided that working for somebody else is not for you and you want the freedom and rewards that running and owning your own business offers you. You have your business idea, you have researched your market, you know the business opportunity is there but you just need to get started. What do you need to do? Who needs to be notified? What business structure should I use? What assistance is available? These are the questions, among many others, that you will be asking yourself! This article is the first in a series of articles looking at the issues that affect people setting up and running a small business and it will look in detail at the types of business entity through which you may conduct your business.
Principally there are three main entities through which you may trade:
Sole trader
Partnership
Limited liability company.
Sole Trader
Sole TraderSetting up in business as a sole trader is very straightforward. When you operate as a sole trader, you are in business on your own account – there is no separate legal entity. The moment you start in business on your own you are a sole trader. You can trade under your own name or a business name. If you wish to use a business name, it should be registered with the Registrar of Business Names.
You will need to register for taxes. You will pay income tax on your business profits under the self- assessment system. You will also need to register as an employer if you have, or will have, any employees working for you. Further, you will need to register your business for VAT if the value of your taxable supplies will exceed the registration threshold (currently €25,390 and €50,790 in a 12- month period for services and goods respectively).
On an annual basis, you will need to file your personal income tax return, together with an income and expenditure account for your business, with the Revenue Commissioners. You will also need to file annual VAT and PAYE returns, if you are registered for VAT and PAYE. You will pay the income tax and social security due on your profits under the self-assessment system and your taxes will fall due for payment in two instalments. The first instalment, the preliminary tax, falls due for payment on 31 October in the tax year and the final instalment (i.e. the balance of any tax and social security for the year) will fall due on the 31st October following the end of the tax year.
Other than the annual returns for the Revenue, you should not have to file any other statutory returns. There is no obligation on you to have an audit carried out or to make public any information in connection with your business.
There are, however, some disadvantages to operating as a sole-trader. Firstly, if your business is not successful, you risk losing all your assets - not only your business assets and funds that you have committed to your business but your personal assets and funds as well. You do not have limited liability – to have limited liability, you would need to incorporate a limited liability company (see below).
Certain tax reliefs are only available if you trade through a limited company. In addition, you may pay more funds into a pension if you operate through a limited company.
Many individuals start out as sole-traders and change to limited company status at a later date. You can incorporate a limited company at any time and you would generally decide to incorporate if, for example, you were looking to raise funds or looking for equity investors. In addition, Corporation Tax rates are currently quite low and to pay Corporation Tax you would need to incorporate. From a commercial point of view, you may find that your clients expect to deal with limited companies, and, in addition, some individuals enjoy the status of being a director.
Certain professions, such as accountants and solicitors, cannot actually trade through a limited company and must either set up as a sole-trader or set up in partnership.
Partnership If you are going into business with one or more people, then you would either incorporate a limited liability company (see below) or form a partnership. A partnership exists when two or more people work together and none is an employee of the other(s). You can either trade under your own names as a partnership or register a business trading name.
You must register the partnership for income tax and for VAT and PAYE, if appropriate. As with sole trader status, you will pay the income tax and social security due on your share of the partnership profit under the self-assessment system. You must file a personal return of income together with a partnership tax return with the Revenue Commissioners.
There is no obligation on the partnership to have an audit carried out and you do not have to publish the partnership accounts.
As with sole trader status, a partnership is not a separate legal entity and the risks outlined above for sole traders will apply to you if you are in partnership. In addition, as a partner, you are jointly and severally liable for the debts of the partnership. You may be held liable for all debts run up by your partner(s) and, if they fail to pay, you could be pursued by the creditors/courts for payment in full (even if you had nothing to do with the debt!). As with sole-trader status, you do not have limited liability. Therefore, you must choose your partners carefully – they could help you make your first million but just as easily lead you to bankruptcy!
Unless otherwise agreed, the profits and losses in a partnership will be shared equally between the partners. It is advisable to have a written partnership agreement drawn up at the outset. The partnership agreement will outline the position on such matters as how profits/losses are to be shared; the capital contributed by each partner; who operates the bank account; how decisions are to be made; what happens on death or retirement of a partner, etc. In practice, the partnership agreement will not be referred to for the day-to-day running of the business. It is really only if there is a disagreement among the partners that you would need to refer to the partnership agreement.
Limited Liability CompanyUnlike sole trader status or a partnership, a limited company is a separate legal entity. A company is owned by its shareholders. The shareholders will generally own the shares by reference to the amount of equity they have invested. If you are not actually investing any funds in the business, you need only subscribe for a minimum share capital, usually €1 or €2.
A company will have both shareholders and directors. The shareholders do not have to be directors and, likewise, the directors do not have to be shareholders. Generally, however, for a small business, the owners of the business would also be the directors. It is really only in cases where you are seeking equity finance that you would have shareholders who invest in your business but do not take part in the day-to-day running/direction of the business and, therefore, are not appointed as directors. Such shareholders would, however, look for a return on their investment and this would normally be paid by way of dividend.
In time, you may have senior employees that you wish to appoint as directors and this can be done without actually giving them an equity stake in the business.
A limited company must have at least one shareholder, two directors and one company secretary. The company secretary and shareholder can be one of the directors so that you only need two people to form a company. Every company director can be held responsible for the affairs of the company and must ensure that all statutory documents are delivered to Companies Registration Office on time. Such statutory documents include annual returns, accounts, notices of change of details of directors, secretary, registered office address, etc.
When forming a limited liability company, you must specify the name of the company, the "objects" for which the company is being formed (the "objects" set out exactly what the company is permitted to do and the business activities that the company will get involved in). If, at a later date, your business is diversifying or the nature of the business is changing, you must make sure that the "objects" of the company allow this and have them changed if necessary.
You will receive a Certificate of Incorporation and you must have Memorandum and Articles of Association prepared. If you appoint an accountant or solicitor to deal with the company incorporation on your behalf, they will deal with all statutory paperwork and you will just be required to sign a few forms.
You must file an annual statutory return with the Companies Registration Office and your company accounts will be available to the public generally for inspection.
You are obliged to have an annual audit carried out if your business profits exceed €253,950 per annum.
As a director of your company, you are taxed as an employee and your company must pay the tax and PRSI due on your salary to the Collector-General under the PAYE system.
Your company must register for Corporation Tax, PAYE, and VAT (if the value of taxable supplies exceeds €25,395 for taxable services and €50,790 for taxable goods in a 12-month period).
One of the advantages of operating through a limited company is that the liabilities of the business are limited to the business assets. Should the business fail, generally, the most that can be lost are the assets of the business. However, if the directors/shareholders have given any personal guarantees for any liabilities of the business, then they will be held personally liable to the extent of the guarantee given. In addition, the shareholders will be held liable to the extent of any amount owing to the company for their shares (i.e. if the issued shares are not fully paid up, the shareholders would be requested to pay any amount outstanding).
The limited liability company option would normally be recommended for individuals setting up in business who, among other things, need limited liability straightaway; are leaving funds in the business and, therefore, wish to pay the lower rates of Corporation Tax; wish to avail of tax planning opportunities that are only available to companies/directors; are seeking equity investors; whose clients expect to deal with limited companies or who enjoy the status of being a director.
Conclusion
As you can see, there are a lot of matters to be considered, but you do not need to make the decision on your own! All good accountants will be able to advise you on the best route to take.
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