So you have a new business idea and have sketched a brief business plan.
What are your options in terms of structure and how do you decide which one is right for you?
There are two main options open to entrepreneurs setting up in Ireland – sole trader and limited company.
I will briefly outline the differences between the two and the issues you need to consider when making a decision on which structure to choose.
Sole trader is the simplest option. To set up as a sole trader, you will need to register as a sole trader with the Revenue Commissioners and submit an income tax return once a year (deadline 31 October of the following tax year). The books are generally easier to maintain and don’t have to be audited. As a result accountancy fees should be lower than for other structures.
Some sole traders register their business name with the CRO. For example, florist Claire Thomas might register the name Blooming Marvellous. (This is NOT the same as setting up a company.) The business name certificate should be displayed at the place of business and a copy given to the bank. Note that there is no restriction on registering a duplicate business name. However, a company name must be unique.
Closing down the business is relatively straightforward.
Limited Company (Click here for company formation form)
A limited company is a legal entity separate to yourself and shareholders liabilities are limited to the amount of share they subscribe. With a limited company if you are setting up in business on your own, you will need to find another person to act as a director although you can own 100% of the shares in the company yourself (single member company). Make sure that you and the other director(s) know what they are getting into as they have legal rights and obligations as the director of a company. See 4 Things Every Director Should Know.
A limited company and its directors are subject to more regulation than a sole trader but the company structure offers advantages in terms of taxation. A simple example of this is if the business is making more money than the director-owners need then the excess is taxed at 12.5% in a company rather than a potential income tax of 20%/41% plus income levy plus PRSI for a sole trader.
Every year, Financial Statements (accounts) will need to be prepared together with a Corporation Tax return and an Annual Return to the Companies Registration Office. Most small companies don’t need to get their accounts audited. Companies which do require an audit include:
- Companies who submitted their annual return to the CRO late in the current or previous year
- Companies with a turnover exceeding €7.3 million, assets greater than €3.65 million and average number of employees of 50 or more
- Companies limited by guarantee (e.g. sports clubs, charities)
- Group companies
- Banking / insurance companies
- Unlimited companies
The company structure does require more accounting and tax work but the additional fees involved should be more than covered by the tax savings in running the business through a company.
The company also provides a structure for introducing additional investors, giving shares to key employees or family members and selling shares in the business.
Closing down a company is more difficult and expensive than for a sole trader especially where there are outstanding debts and a liquidator is required.
Potential Pitfall 1: Company directors need to be mindful that the money in the company’s bank accounts are not their personal funds. Directors should only withdraw money from the company as part of a salary, dividend, reimbursement for motor and travel expenses or repayment of a loan given to the company. Any payments in excess of these could contravene the Companies Acts and trigger a tax liability. Always seek professional advice before withdrawing money from the company. See www.odce.ie for details of directors who have fallen foul of this legislation.
Potential Pitfall 2: Remember that most directors need to also submit an Income Tax return even if their only income is a salary from the company. Surcharges and penalties can result
for non submission of Income Tax returns even if all the tax has been paid through the company payroll.
Some issues to consider when making a decision on legal structure
- Will the business make sufficient profits (now or in the future) to justify the additional expense of running a company?
- Is a company structure required for a grant application or is there a potential investor in the wings?
- Are you willing to deal with the paperwork associated with the business in a timely manner or will you outsource/delegate this to someone else?
- Is there a good marketing reason to trade through a company rather than as a sole trader?
- Do you want to protect the business name by registering a company?
- Do you accept that the company’s accounts will be filed on public record at the CRO (although these will be abridged for small companies)?
- Is limited liability important in your industry sector?
This is just a summary of the issues we come across most often. You can find more information on the advantages and disadvantages of a limited company on www.parfreymurphy.ie/advantages-and-disadvantages-of-a-limited-company. For more information on the responsibilities of directors see www.odce.ie.
Update: Mileage and subsistence rates can be found here. These can be claimed by directors and employees but not sole traders. Sole traders need to keep receipts for motor expenses.
Don’t forget that new start-up companies which commence trading in 2009 and 2010 will be exempt from tax, including capital gains, in each of the first three years to the extent that their tax liability in the year does not exceed €40,000.