Sole Trader, Partnership or Limited Company
The first decision to make is whether to start trading as a sole trader or a limited company. Each has their benefits and drawbacks. The choice of legal structure depends on personal tax circumstances, financial resources, degree of control sought and the level of risk assessed.
Details of the formats available, and the advantages and disadvantages of each, are listed below:
A sole trader is a business that is owned and controlled by one person. This structure is very attractive for those entrepreneurs who wish to retain total control and ownership of the enterprise.
In legal terms a “sole trader” is described as a person trading under his/her own name, or a registered business name. Many sole traders who decide to operate under their own name can do so without any particular problem.
However, if you use a name other than your surname, you must register the name in accordance with the Registration of Business Names Act of 1963. The cost of registering a business name is €30.
Advantages of the Sole Trader
• Very simple to set up. No legal formalities compared to other structures.
• The sole trader is not required to register public accounts, therefore confidentiality is maintained.
• The income from the business is personal income and most business expenses can be offset against it for tax purposes. The tax is paid at personal rates.
• Total responsibility for the business is in the hands of the owner.
• The relative ease of winding up the business.
Disadvantages of the Sole Trader
• The owner is personally liable for all debts of the business.
• Since there is only one owner of the business, there is a limit to the amount of capital that can be raised for operations. Many may stay small because of financial restrictions.
• The life of the business depends entirely on the owner.
A partnership is, in essence, an extension of the concept of the sole trader, which covers cases where two or more people join together to start a business. Partnerships can have up to twenty members, some of whom may be “sleeping partners”, who have contributed capital to the enterprise, but who have no say in the running of the business.
While not a legal requirement, most partnerships start with the drawing up of a formal agreement. Normally drafted with the help of an accountant and solicitor, the agreement would typically cover such areas as:
• Profit sharing
• Voting rights.
Advantages of a Partnership
- Increased sources of capital and credit.
- Improved decision-making potential.
- Improved chances for expansion.
Disadvantages of a Partnership
All partners are liable for the debts of the business on a joint and several basis.
While all partners may have a say in the running of the business, managerial problems may arise.
Unless otherwise agreed, the consent of all partners is needed before a new partner can be introduced.
A limited company is a distinct legal entity. It is quite separate from its owners, who are shareholders, and from its directors, who make decisions on behalf of the company.
As a separate entity it has sole responsibility for its debts, which frees its owners from this responsibility. Its liabilities are limited to the paid-up share capital – hence the company is said to have “limited liability”.
Advantages of a Limited Company
- Limited liability – shareholders are only liable to lose the share capital they subscribe.
- Shareholders personal assets are protected.
- Greater company pension scheme can be secured.
- Greater ability to raise finance by the issue of shares and also under the Business Expansion Scheme.
- Ownership of the enterprise is spread over a greater number of people.
- Personal tax advantages can accrue.
Disadvantages of a Limited Company
- Limited liability may be negated in practice by lenders seeking personal guarantees.
- Adhering to legislation contained in the Companies Act can be costly and time-consuming.
- The need to prepare and file audited accounts.
- The payment of additional taxation when accumulated profits are withdrawn from the company.
- The loss of profit-sharing flexibility.
Forming a Limited Company
The cost of the formation of a company and registration with the Revenue Commissioners is currently approximately €650.
Entrepreneur(s) should be aware of the following when forming a limited company:
- The company must have at least one shareholder and two directors.
- When forming a company from scratch, a suitable name will have to be chosen and two documents, the Memorandum and Articles of Association must be filed with the Registrar of Companies.
- A Certificate of Incorporation is necessary before trading can commence.
- Where companies are bought off the shelf, the name may be unsuitable and amendments to the Memorandum and Articles of Association may be necessary.