One of the first decisions facing new entrepreneurs is what the legal structure of their business should be.
The decision will depend on a number of factors including the type of business, the number of people involved in the running of the business, whether investors are required, what profits are expected in the business.
A sole trader is a type of business that is owned and run by one individual. A sole trade is easy to set up. The sole trader simply registers with the Revenue for taxes. A business name may also be registered with the CRO but this is only required if the sole trader is not trading under his/her own name.
There is no legal distinction between the owner and the business. All assets and all debts of the business are also assets and debts of the owner.
The books are generally easier to maintain and do not have to be audited unless the business is regulated (e.g. mortgage broker).
A partnership is where two or more people run a business together with the profits being shared proportionately. Each of the individual partners has ownership of company assets and responsibility for liabilities, as well as authority in running the business. It is also relatively easy to set up.
The important thing to remember in partnerships is that, in general, each partner is jointly and severally liable for the acts of the other partners. This means that partnership creditors typically have recourse to the personal assets of each of the partners for settlement of partnership debts. It is therefore vital that a Partnership Agreement be in place.
A private limited company is a separate entity to its owners and management. “Limited” refers to the liability of the shareholders who are not liable for any debts incurred by the company. They are only required to pay for the shares they subscribed for. The exception to this is where owner/managers of companies sign personal guarantees, thereby guaranteeing to pay a particular company debt if the company is unable to do so.
Companies are useful when there is more than one person involved in the company or more than one investor. However, a company can have only one shareholder and one director if required. Companies are also required to have a company secretary and registered office.
The company is owned by its shareholders who appoint a board of directors to manage the company. However, for many small companies in Ireland, the shareholders and directors are one and the same.
Companies can be more complicated to manage and involve more paperwork than sole traders or partnerships. Limited companies must also submit accounts to the Companies Office each year which are available for download by the general public on www.cro.ie.
Having a limited company can sometimes give your business a better image and can look more professional.
Which Structure to Choose?
It is important to discuss your options with a trusted advisor before making a decision on which structure to choose.
Remember, it is always possible to change your mind once the business has been up and running but there will be tax issues to consider. For example, many small businesses opt for sole trader to begin with and transfer to a company once they have a viable business.
The very best of luck with your new business venture!