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You have decided to start you own business and need now to choose the trading vehicle you intend utilising.
In making an informed decision you need to be cognisant of not only the legal aspects of the decision but also of the taxation aspects.

I have set out hereunder some of the salient points which should be considered in making this choice.  In some cases the ultimate decision may be dictated by outside considerations, as some professions do not allow their members to trade through a company.  In all cases professional advice should be taken to ensure that your needs as a businessperson are met.

Business Structure
The principle forms of business structure comprise:

  1. Sole Trader
  2. Partnership
  3. Private Limited Company


Sole Trader

The simplest form of business structure in Ireland is that of a sole trader.  You trade under your own name and register in your own name as a self-employed person with the Revenue Commissioners.  There are very few legal formalities involved and you remain in full control with sole ownership of the assets of the business and any profits generated.

There is one significant disadvantage in that you are personally responsible for all of the liabilities of the business without limit.  In other words in a doomsday scenario you could be sued in your personal name by creditors of the business to recover debts from any of your personal assets including your home.  Obviously, risk can be minimised in certain circumstances by proper insurance cover.

A partnership exists where two or more individuals enter into business with the express purpose of making a profit.  This has an obvious advantage in that it allows partners to bring different skillsets to the business but also brings a responsibility of sharing in the liabilities of the business.

In terms of taxation, the partnership registers with the Revenue Commissioners and the partners are taxed as self-employed people on their individual shares of the business profit.

Care needs to be taken as regards who you choose as a partner, as you can be exposed personally by the actions of a reckless partner.  As your personal assets can be placed at risk in satisfying all partnership debts, I would strongly recommend that a Partnership Agreement be set up with your Solicitor to ensure that each partner is clear on their rights and obligations in the event of a subsequent dispute.

Another aspect which should always be considered in the context or drawing up a partnership agreement is how you deal with a situation where a partner becomes ill, wishes to retire or dies.  Many individuals in partnership take out insurance and life cover products on each other to cover such eventualities.

Many consider a company as being the most useful vehicle to trade with.  It is a separate legal entity to the shareholders who own it and the Directors who run it.

Once you set up the company with company formation agents, which typically costs between €300 to €500, you can then register the company with the Revenue Commissioners.

From a practical point of view the company has the advantage of limited liability and in a litigious world that is something worth considering.  In effect, limited liability limits your obligation to meet the debts of the company to the amount you agreed to pay for Shares in the company.  This is normally a nominal amount.  There are exceptions to this protection, including situations where the directors engaged in fraudulent or reckless trading or where personal guarantees are given.

From a tax perspective profits are charged at a rate of 12.5% as opposed to Income Tax rates applying to sole traders or partners at rates up to 46%.  However there are other factors which need to be taken into account.  “Close Companies” (e.g. a typical family company) can have certain tax penalties imposed on them.  There can also be a double charge to Capital Gains Tax on the extraction of assets from a company.  Moreover, the ongoing compliance costs of preparing company accounts, Corporation Tax returns, annual returns to the Companies Office and the book-keeping obligations are much higher than for a sole trader or partnership.

On the plus side there are also many tax advantages in addition to the 12½% corporation tax rate.  There is more leeway in providing for pensions of employees and directors.  In addition, the cashflow cost of a company investing in property or plant is considerably more cash efficient than that of a sole trader or partner as a company can purchase more from its after tax income as it only loses 12½% tax.

I think it is fair to say from the foregoing that choosing the appropriate trading vehicle poses many questions, and appropriate professional advice can help you to make the choice that best suits your own individual circumstances.