June 2020

Ireland, like many countries around the world, is full of micro, small and medium businesses. According to the Central Statistics Office (CSO) there are a quarter of a million active Small and Medium Enterprises (SMEs) in Ireland and the latest results from the CSO 2015 Business Demography showed almost a million people in the employment of SMEs.

Often times an employee would decide to start their own business. The idea of owning a business or being your own boss is somewhat exhilarating for many, especially if that industry is booming, but running a business comes with a lot of challenges which could frustrate your career if you don’t get the right support. You might avoid those pitfalls by seeking help from people with business experience.

I have had the honour of working with some local businesses in setting up and in supporting them as they grow. If you desire to start your own business, you must know the legal structure of your business as this would reflect in your business plan. I have provided the three main business legal structures below.

Sole Trader

Many people opt for the sole trader option for sake of simplicity. You need to register as self-employed with the Revenue Commissioners. There is no obligation on you to prepare and file financial statements. If you wish you can register a business name with the Companies Registration Office.

The downside to trading as a sole trader is that you are personally liable for the debts of the business. Your personal assets such as your home and savings can be endangered. The profits of the business are treated as your income. Be aware that the Republic of Ireland has a progressive income tax regime.

Partnership

A partnership is where two or more people set up a business with a goal of making a profit. The benefit of a partnership is that people can be invited to invest in a business if their skills complement those of the existing partners.

There are two types of business partnerships.

General Partnership

A general partnership can be set up by 2 or more individuals or companies. In the vast majority of cases the number of partners is limited to a maximum of 20. A general partnership can be a partners’ surname. Alternatively, the partners may decide to register a business name with the Companies Registration Office.

In a general partnership all the partners are personally liable to cover any business losses incurred.

A general partnership is required to register for tax purposes with the Revenue Commissioners. This includes income tax, VAT, and PAYE/PRSI. The business partners will each pay income tax on the income they earn from the partnership.

For more information on general partnership, please click here.

Limited Partnership

There are several important differences between a general partnership and a limited partnership.

With a limited partnership, one of the partners is a general partner who has unlimited liability should the business incur losses. The liability of the other partners is limited to the amount of capital they invest in the business.

Limited partnerships must be registered with the Companies Registration Office.

Limited Company

There are benefits to setting up a limited company when launching a new business. Firstly, it gives you more credibility if you want to trade with medium or large sized businesses. Secondly, the company will pay corporation tax at 12.5% on the taxable profits of the business. Thirdly, the personal assets of the business owner(s) are protected, should the company incur losses.

You must complete the registration process to set up a company via the Companies Registration Office portal.

Things to be aware of if you choose to incorporate a limited company.

Firstly, the process is more complex to complete compared to a general partnership or sole trader. If there is a single director in the company, you need to appoint an external company secretary.

Secondly, you need to file annual accounts with the Companies Registration Office.

Thirdly, there are fines and penalties if you file returns late with the Revenue Commissioners and the Companies Registration Office.

Finally, there are provisions in the 2014 Companies Act, which can make the officers personally liable for the debts of the company if there is an attempt to defraud creditors or trade in a reckless manner.

Note that a limited company must be registered with the Revenue Commissioners, who will issue a Tax Reference Number.

Conclusion

Deciding which legal structure best fits your proposed business model, is one of many decisions any entrepreneur will make in the course of preparing a business plan. It is important to understand the pros and cons of each business type.

That said, there are other areas of a business plan that deserve more time and attention, particularly market research, cashflow planning, and preparing a marketing plan. Read my blog on the key areas a business plan.

I would encourage you to remain focused on and passionate about implementing a credible and well-researched business plan. You will take a giant step forward in creating the life you want for yourself. I wish you every success.

I was recently introduced to a young talented web designer / developer during my research into how rapidly people are moving their businesses online as a result of COVID-19 pandemic. James has been the bright kid who had contributed hugely to the success of the agency for which he had worked for years but, due to the high demands in websites, he has decided to start his own business.  The problem is, James is a tech guru but hardly a business expert. He soon learns his shortcomings very quickly when he tried to apply for government grants available to startups. 

James needs a business plan. Yes, he knows his trade inside out and he even has some clients who have paid upfront, but when you seek outside funding either from a bank, an investor or through the government, you need to articulate your business properly on paper in order to convince the person from whom you seek financial assistance. This is a skill that James lacks. This is a skill that most talented people lack, and I will try and explain to you what you need in a business plan.  

The Business Idea

A solid business idea is the foundation for any business plan. You must be very clear about what you’re proposing to bring to the market. How will it bring value to your customers? What makes you different from the competition? In other words, what makes you so special about this offering or why should anybody care about it? 

Business & Personal Objectives

What are the business and personal objectives behind your proposed startup? Is it for a better living standard? Is it to work from home in order to spend more time with family? Is it to be financially independent? Or is it just to be your own boss?  

In today’s fast economy, you often hear someone start a business, scale it up, sell it, make a ton of money and start another business – these are serial entrepreneurs. You also hear of people starting a business just so they could travel the world. People have different reasons for going into business and no one will judge you for that, but you must know what your objectives are.

Market Research

To have a fantastic business idea without conducting a market research would be naive. A primary market research will help you identify the scale of your business idea in monetary terms. Who are your potential customers? Where are they located? What their demographics and psychographics?  What would they pay for your products? Who are your competitors? How do you intend to bring your products to your customers?

Cashflow

Many businesses fail today, not because they are not profitable, but because they lack cashflow. Cashflow is the lifeline of your business. How much capital do you need in order to start it and to run it? What are your fixed and variable costs? 

What are your personal costs like mortgage or rent, car, hospitality, food, medical expenses etc. It may take 2 – 3 months to get your first customer, hence the importance of cashflow. If you don’t have access to funds and there’s a shortfall, you might run into serious trouble and this might threaten the life of your business.

Marketing Plan 

Many talented people have gone into business with the hope that their talents will attract customers to them. This might work for some people who already have a high demand for their products even before such products are ready, but, even with that, you still need to create awareness for your products if you want to reach beyond your immediate family and friends. The most talented people are not usually the most successful in business, but the most marketed people almost always win, and these are the ones that end up hiring the most talented as they grow.   

There are many marketing tools out there, but my advice is to find someone who is good at marketing to help you with your marketing plan. You will find life much easier in the long run.

Conclusion

A well-researched and credible business plan is important for any startup. Your local enterprise office will provide you with a business plan template, and a range of training programs that could help you. There’s a caveat: a business plan is what it is – a plan. In real world, things don’t often go exactly as planned, but having a business plan will always remind you why you came into this business in the first place and help you to stay focused. 

Owning a business could give you some freedom, but it often comes with a huge price. You may have forget about those regular holidays for the first few years; you may not earn an income for the foreseeable future; you may even lose some close friends as your goals have changed and time is now a currency you cannot afford to waste on things that don’t contribute to your business. 

The light at the end of the tunnel is, if you are focused and passionate and become successful in your business, your rewards will go beyond holidays, regular income, quality friendship and a life of independence. You would have created the life you wanted for yourself and nothing can be more rewarding than that.