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.
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.
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.
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.
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.
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.
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.