When you decide to start a business one of the first decisions you have to make concerns the type of business structure you will use. Your initial choice is between operating as a sole trader (or a partnership if there is more than one person involved) or a limited company.
The choice that will be made will differ according to the type of business involved, the level of credit required and the personal circumstances of those involved in the business.
Where you decide to operate as a sole trader, you make the decision to run the business in your own name. The incoming profits of the business belong to you and you are personally responsible for any debts or liabilities that the business incurs.
You will generally have a set of accounts prepared every year showing your profits from the business. You will file a tax return every autumn and this tax return will include your income from the business and any other income you have. If you are jointly assessed for income tax purposes, it will also include your spouse’s income.
As a sole trader, you might operate under your own name, for example “John Jones, Carpenter”. Alternatively you might trade under a business name for example “Newbridge Carpentry”. You will need to register this business name in the Companies Registration Office but there are no further obligations after that and it is a very simple process. On your invoices and letters, your official description will be “John Jones trading as Newbridge Carpentry”.
Advantages of a sole trader:
The advantages of operating as a sole trader in Ireland are as follows:
- Other than registering a business name, there are no other filing obligations with the Companies Registration Office.
- There is no obligation to file the accounts of the business with the Companies Office and so the affairs of the business are kept private.
- The administration of the business will be simpler as there will be no need to have company meetings and comply with the quite complex company law legislation.
- There will generally be a saving in accountancy fees.
- In the event that the business buys some property (for example a business premises), there won’t be a double charge to capital gains tax which does arise when property is registered in the name of a limited company.
- Suppliers may be more willing to do business with the company because they know that the owner will be personally responsible for their bills. (They can get round this, with a limited company, by seeking a personal guarantee).
A limited company is a business you formally register in the Company Registration Office. All assets and liabilities belong to the business itself, not to the shareholders. There are more administration requirements for limited companies and the accounts of the company must be filed annually with Company Registration Office, who will then publish the accounts.
Advantages of a limited company:
The advantages of operating as a limited company in Ireland are as follows:
- The main advantage of a limited company is that it provides protection for somebody involved in business so that if the business doesn’t go well and becomes insolvent, the debts of the business belong to the limited company only and do not belong to the owner of the business. Once he has complied with the law and stopped trading when the business became insolvent, he has no personal responsibility for the debts.
- In the event that the business becomes successful and the owner wants to invite people to invest in it, he can sell shares in the company and regulate what rights the new shareholders have.
- If a business becomes successful and the owner wishes to retire or move on from the business, this can often be achieved more easily where the business operates as a limited company.
- Some suppliers and government bodies will be more comfortable dealing with a limited company rather than a sole trader.
- If the business becomes successful and bigger, it is easier to regulate the running of the company and relations between the various owners (i.e. the shareholders) where the business operates as a limited company.
The nub of the matter is this. Limited companies allow business people to take risks and establish businesses with the comfort of knowing that should the business fail, they will only lose what they have invested in the business. Furthermore, it provides a mechanism whereby others can invest in the business.
A partnership is simply a number of sole traders who come together to operate a business. All of the points above in relation to a sole trader apply but the following points should be noted:
- Each owner will file their own income tax returns and include whatever income they have received from the partnership.
- All partners are personally responsible for all of the debts of the company and it is open to anybody to whom money is owed to sue one or more of the partners for all of the debt.
- The Partnership Acts regulate the relationship between the partners and what generally happens is that the partners will enter into a partnership agreement setting out how the business will be run and what each partner’s entitlements and obligations are.
- A partnership agreement might provide for “silent partners” (who are similar to shareholders in a limited company and are not involved in running it). The silent business partners may be entitled to a share of the profits or of the assets of the partnership but don’t play a part in the day to day running of it.
It is impossible to make a general recommendation as to which form of business structure is suitable as the circumstances will be different in each case. In many cases, we will advise our clients to operate as sole traders and in others, as limited companies.