The choice of legal structure depends on many variables and often personal preferences. In many cases the choice boils down to being unincorporated (a sole trader or partnership) or forming a limited company. Many business people assume that setting up a company is the essential first step in going into business. A company however is not always the best form of structure for starting up.
A limited company has the following main advantages:
- Liabilities of the company are the responsibility of the Company – the shareholders are liable to lose only the share capital they subscribe.
- Income tax is paid only on salaries drawn and benefits in kind and generally personal higher rate tax can be avoided if profits are retained in the business.
- Improved options for raising finance.
- Greater pension benefits can be secured.
- The standard Corporation Tax Rate for trading income is 12.5% (apart from certain excepted trades). This compares with a marginal Income Tax rate of 41% plus PRSI and health levies.
- Finance can be raised under the Business Expansion Scheme for certain companies.
- Structure better suited to facilitate tax planning opportunities.
- Certain intangible benefits, e.g. presents more professional image.
- Easier to spread ownership of the company.
A limited company has the following main disadvantages:
- In accordance with the Companies Acts, financial and certain other information has to be filed on public record.
- Compliance with the considerable legislation contained in the Companies Acts affecting limited companies can be time-consuming and costly.
- Lenders and key suppliers often seek personal guarantees from directors which tend to reduce significantly the value of limited liability.
- Restrictions on relief available on trading losses.
- Investment income (and certain trading income only) subject to 25% corporate tax rate.
- Additional tax is payable when accumulated profits are withdrawn from the company as dividends, extra remuneration, benefits in kind or loans.
- Investment income will be subject to a corporation tax surcharge of 20% unless it is distributed by way of dividend. This may also apply to trading income of companies carrying on professional activities.
- In some circumstances, there can be unnecessary a double charge to tax on income and/or capital gains.
A sole trader/partnership structure has the following main advantages:
- Confidentiality is maintained since the public has no access to accounts.
- PAYE and PRSI contributions do not need to be paid when proprietors or partners draw cash (although they do catch up later).
- Losses from the business can be set off against other income.
- It is relatively easy to transfer the business to a limited company at some later stage, (subject to capital gains tax and stamp duty issues).
A sole trader/partnership has the following main disadvantages:
- Possibly higher Tax liabilities.
- Offer fewer tax planning opportunities.
- The owner is personally responsible for all the liabilities of the business (i.e. unlimited liability); with a partnership, partners are liable for debts on a joint and severance basis which means that if one partner fails to meet his share of the partnership debts, creditors can look to other partners for settlement.
- Less flexibility in transferring ownership (for example, to other members of the family).
Forming a company
The formation of a company can take between 5 to 10 working days from application and is dealt with by us. A company must have at least two directors and one shareholder. One of the directors may also act as company secretary. The formation of a new company involves choosing and agreeing an appropriate name, compiling suitable Memorandum and Articles of Association, lodging these and other documents with the Registrar of Companies and obtaining a Certificate of Incorporation. We will complete and process all this documentation for you.
You will need to hold a first meeting of directors to:
- Appoint additional or new directors and the company secretary.
- Appoint the auditors.
- Determine the financial year end.
- Determine the banking arrangements.
- Allot shares and approve transfers of subscribers’ shares, as appropriate.
- Make the arrangements for keeping statutory books (such as Register of Members, Directors and Minute Book and designate the company’s registered office).
You should consider carefully in consultation with us whether you need to amend the ‘standard’ or ‘off-the-shelf’ Articles of Association to take account of:
- The rights of directors to decline to register a future share transfer and of shareholders to buy shares from other shareholders before sale to outsiders, or if a shareholder ceases to be a director or employee or dies.
- The chairman’s casting vote.
- The shareholder/director’s voting rights.
- Who controls the company (different levels of shareholding confer different rights).
We can assist in the completion of the first board minutes and the maintenance of the statutory books.
Many businesses operate under the names of their owners (e.g. Paddy O’Brien, or Kelly & O’Connor); others adopt a business name (e.g. Speedikleen or Kelly & Co.). However, if you adopt a business name other than your true surname (and christian names) or registered corporate name (in the case of a company) you must register the name under the Registration of Business Names Act 1963; for instance, if B.P. Murphy Ltd. wished to use ‘BPM’ as a business name, the name would have to be registered under the Act. The Registration of Business Names Act 1963 grants the Registrar of Companies, the right to refuse the registration of any name, which in his opinion is undesirable. The applicant has the right to appeal against the Minister’s decision to the High Court.
If a business name is used, the Certificate of Registration must be displayed in a prominent position at all locations to which customers or suppliers have access.
It is illegal to pass yourself or your business as being someone else’s, whether intentionally or otherwise. If, for instance, you manufactured and sold water pumps under the business name “Byrnes” then you could be sued by Byrnes Ltd. for passing yourself off as them. Steps should therefore be taken to ensure that your proposed business name is usable. You can obtain access to the list of all existing companies to check this out. It is therefore recommended that you give your accountant at least two business names in order of preference in anticipation of such problems.
Where a business name is used for a partnership or sole trader, letter heading and written orders, invoices, receipts and written demands for payment of business debts must include:
- The name and nationality (if not Irish) of each partner in the partnership or the individual in the case of a sole trader.
- The business address in the State (at which any document relating to the business can be legally served).
Related Article: So You’re Thinking of Starting Your Own Business?