Businesses can be carried out as a Sole Trader (just one person), a Partnership or as a Limited Company. Your choice will depend on various issues; some of which are raised below. Essentially principles for Sole Traders and Partnerships are similar with the only difference being that Sole Trader is one person and obviously Partnerships are where there are 2 or more people involved. The single biggest disadvantage to Sole Traders and Partnerships is the personal liability (which is not limited) of the person(s) carrying out that business.
A limited liability company is owned by its shareholders who have shares in the company. A limited company must have at least one shareholder, two directors and one company secretary. (One of the directors can also be the company secretary). The shareholders do not have to be directors and the directors do not have to be shareholders. However, as the vast majority of companies are owner run, the shareholders would usually be the directors.
Once a company is set up, the company runs the business as a separate legal entity. If the company gets into debt, the creditors generally only have a claim on the assets of the company and not against the directors personally (except in exceptional circumstances such as fraud). 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 reality, where a bank wants security for money it is lending (if it lends), the directors/shareholders will have to give guarantees).
As with partnerships, it is always advisable to have a shareholders’ agreement in place for the company. This would generally cover similar issues as a partnership agreement which are discussed below. Companies must file an annual statutory return with the Companies Registration Office and in the majority of cases company accounts would be publicly available for inspection. You are obliged to have an annual audit carried out if your business profits exceed specified thresholds. Most small companies would be exempt from having to have the accounts audited. A company must register for Corporation Tax, PAYE, and VAT. As a director of the company, you would be taxed as an employee and the company must pay the tax and PRSI due on your salary to the Revenue Commissioners.
A summary of advantages to using a company would be:
- Low corporate tax rates on profits (12.5%).
- Greater flexibility for tax planning (e.g. accounting procedures may allow greater return on profits and pension contributions).
- Limited liability of shareholders.
- Greater flexibility to raise finance for the company and the business, (equity investment and Business Expansion Scheme).
- Perpetual succession – the company can hold assets in its own name and while shareholders and directors may change the company does not.
- Transferability of ownership – ownership in the company is relatively straightforward to transfer and is done simply by transferring the shares in the company.
This is where 2 or more people agree to run a business in partnership with each other “with a view to making a profit”. The partners are jointly responsible for running the business and for payment of the debts of the business. This means that your personal assets could be used to pay creditors of the partnership in the event that the business failed.
The profits (and losses) in a partnership are shared equally between the partners, (unless agreed otherwise). It is always advisable to have a written partnership agreement put in place at the beginning. The partnership agreement can outline the position on such matters as
- division of profits/losses,
- the capital contributed by each partner,
- operation of bank account(s),
- decision making process,
- division of labour,
- what happens on death or retirement of a partner.
The partnership must be registered for income tax, VAT and PAYE (if appropriate). Each partner will pay income tax due on their share of the partnership profit under the self-assessment system. A personal return of income together with a partnership tax return must be filed with the Revenue Commissioners. With careful tax planning, in the event of a slow build of revenues in the business, you can defer paying (substantial) tax for the first few years. There is no obligation on the partnership to have an audit carried out and partnership accounts do not have to be published. This gives the advantage of there being no publicity regarding the finances of the business of the partnership. Partnerships are not as heavily regulated as companies which must comply with extensive company law regulations and disclosure provisions.