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There are a number of issues you need to consider if you are thinking of starting a new business, one of these being the legal entity your business will take.
There are three basic types of ownership and the structure you choose can have significant impact on how you are protected under the law and the way you are affected by regulations and taxation rules.
The principle options for registering your business are as follows:
Sole Trader
This is where a business is owned and run by an individual; it is the simplest form of trading.
Partnership
This is where 2 or more people agree to run a business in partnership with each other. Although there is no legal obligation, it is advisable to get a partnership agreement drawn up by a solicitor which can help avoid friction or misunderstanding between partners. This agreement should cover division of profits, remuneration of partners, management of the partnership and termination of the agreement.
Limited Company
The business is a separate legal entity from the people who own & run it.
Each of these options has their own benefits and disadvantages as follows:
Sole Trader
Advantages
- Easy to set up: you simply need to register for tax by completing a TR1 form (available on line or from your accountant) and register a trade name if applicable with the Companies Registration Office (CRO)
- Low annual costs: lower annual costs as there is no requirement to have an audit carried out on your books and records or to submit your annual accounts to the CRO.
- Lower future capital gains tax: if in the future you decide to sell your business capital gains tax is applied only once.
Disadvantages
- Income tax on all profits: you are liable to pay income tax on the net profits made by the business rather than just the monies taken out by way of drawings. The effective rate of tax is 20% to 40% plus the universal social charge and PRSI.
- No limited liability: if your business fails your personal assets could be used to pay creditors.
- Difficulties to get investment: it is not easy to attract personal investors to grow the business. Investors in a sole trader business do not qualify for some of the tax breaks that apply to a limited company.
- Restrictions on tax relief for pensions: there are restrictions in place for tax relief available on monies invested in pensions when acting as a sole trader.
Partnership
Advantages
Similar to Sole Trader
- Easy to set up:
- Low annual costs:
- Lower future capital gains tax
- There are greater resources available in terms of knowledge & experience than a sole trader may have
- Continuity is safeguarded in the event of illness
Disadvantages
Similar to Sole Trader
- Income tax on all profits
- No limited liability
- Difficulties to get investment
- Restrictions on tax relief for pensions
- Partners may turn out to be incompatible
Limited Companies
Advantages
- Limited Liability: the owners are not responsible for the debts of the company except where they have given personal guarantees or act fraudulently.
- Lower tax rates apply to any profits in the business not taken by way of salary. The corporation tax rate that usually applies is 12.5% for trading companies but some professional companies will have an effective rate of 19%. Non-trade income is taxed at 25%. Also of benefit, is that new companies are now exempt from annual CT charges on liabilities up to €40,000 for the first three years. However this relief can be restricted to the amount of Employers PRSI paid with a limit of €5,000 per employee and overall limit of €40,000. This relief does not apply to service companies and companies whose liabilities would be taxable at 25% & not 12.5%.This relief applies to companies formed up to 2021.
- Improve tax relief for pensions: there are fewer restrictions on pension payments made through a limited company resulting in more options for tax planning.
- Easier to attract investors: Limited companies can often find it easier to attract outside investment such as EIIS. This allows investors to avail of attractive tax relief on their investments.
- Relief on your own funds invested in your company: you may be eligible for a tax refund of up to 40% of the capital amount invested under Start Up Refunds for Entrepreneurs (SURE).
- Easier to get some Government grants: seeking government grants to aid with employment costs through boards such as Enterprise Ireland can be sought via limited companies.
- Stronger business image: a limited company approach often portrays a stronger image with your customers, which may assist you in tendering for work etc.
Disadvantages
- Higher set-up and annual costs: there are higher set-up and annual costs associated with being a limited company. At set-up the company will need to be formed & registered with the CRO. On an annual basis you will need to submit your accounts to the CRO. There are costs involved in complying with these Companies office formalities.
- Higher accountancy costs: the costs for preparing annual accounts and submitting tax returns for companies can be higher than those you would expect to pay if you were a sole trader.
- Audit Requirement: if your company exceeds certain size limits or is in a particular trade sector it may require an audit thus incurring further costs. Generally most small businesses will be exempt from audit.
- Greater accountability and responsibility as a company is more closely regulated by law. In a limited company you must maintain proper books of account and the director’s responsibility are more onerous to that of a sole trader.
- Possible double taxation: as the company pays tax on profits & gains, it then can only distribute what is left to the shareholders. This can give rise to tax being paid by the shareholders when they withdraw the retained profits. However the exposure to CGT can be limited with good tax planning.
Before choosing a business structure you need to ask yourself some key question including;
- Will I take all profits out of the company by way of salary?
- How I see my business developing?
- Who will be my clients?
- Do I need outside investment or grants to grow my business?
- Do I want to sell the business in the short term if successful?
The response to these types of questions will help you decide which path to take in registering your business.
How we can help
We would be more than happy to sit down with you and have a one to one meeting to undertake a review of your business venture and advise you on the best way to register your business. For more information please contact [email protected].