Prefaced by Eoghan Brunkard, information via FETAC
There are four main types of legal format an enterprise start up may take. These are a Sole Trader, a Partnership, a Limited Liability Company, and a Cooperative.
There are a number of factors, which influence a person decision as to the format their business will take. These are:
- Their attitude towards liability (Companies provide the owners with protection from the losses of the businesses)
- The type of cliental you will be dealing with, there is a business culture that would prefer to do business solely with Companies (rather than Sole Traders/Partnerships), Companies are assumed to be more legitimate
- Certain types of business can only be formed as sole traders or partnerships (for instance if there is only one person in the business)
- Certain tax breaks only are available to Companies, similarly, after this year’s budget sole traders start ups do not have to pay income tax under a certain threshold for two years
A. Sole Trader
When the business comprises only one person (without a partner or director) the business is automatically a sole trader. This is the simplest and most basic form of business structure.
The advantage of being a sole trader is that, apart from normal tax returns, which every taxable person must make, a sole trader is not required to make public any information about the business. The profit or loss of a sole trader is combined for Income Tax purposes with his / her other income (if any).
The downside of being a sole trader is that you have no protection if the business fails. All your assets become available to pay off your creditors, as no distinction is drawn between personal and business debt.
B. Partnership
A partnership is an agreement between two or more people to go into business together. The agreement may be no more formal than a handshake or may run to a multi-page legal document.
The law governing partnerships is set out in the Partnership Act 1890, which specifies the relationships between the partners and between them and other persons who deal with them. All partners should sign a partnership agreement that sets out how the business is to be financed, how profits and losses are to be shared, and what will happen if one of the partners decides to leave. These are important points. Failure to agree on them at an early stage can lead to difficulty later.
In a partnership, each partner shares in the ownership of the business’ assets and in the authority for the management of the business.
Just like a sole trader, each partner is personally liable for the debts of the business. However, in addition, each partner is jointly and severably liable. This means that, if the business fails, an individual partner could be left to pay for everything out of their own pocket (with an entitlement to reclaim from the other partners their fair share). This is a major risk in entering into a partnership.
The profit or loss of a partnership is divided between the partners in accordance with the partnership agreement (if any) and the appropriate portion is taxed under Income Tax in the hands of the individual partners, in addition to any other income they may have
C. Limited Liability Company
A company is an association of people who contribute money to a common fund to be used in some business venture and to share the profits or losses of the concern. It is a separate legal entity from the people who establish it (the members).
In Ireland, companies are registered under the Companies Act 1963 to 2006. Normally, companies have two members but EU law allows for the establishment of single member companies – where one person owns 100% of the company. However, such companies must comply with the normal requirements for two directors and a company secretary.
Where a company’s liability is limited, its members (those who own it) are only responsible for the company’s debts:
- Up to the amount of any shares held: A company limited by shares
- Up to the amount of any guarantee given: A company limited by guarantee (Note that a company limited by guarantee may or may not have share capital also)
The name of a limited liability company must end in the word “Limited” or the abbreviation “Ltd.” (or the Irish equivalents, “Teoranta” and “Teo”).
In contrast to the more usual private limited company, which may have no more than 50 members (excluding employees and former employees), a public limited company (plc) must have a minimum of seven members and has no maximum limit. A plc is also allowed to invite members of the public to subscribe for its shares directly, in return for which privilege it must file more detailed information with the Companies Registration Office.
The establishment of a company is a formal legal process, with certain information required to be available for public disclosure. A company is also required to have an annual audit of its accounts (subject to exemptions). Full details of the registration process, and the fees involved, are given on the Company Registration Office’s website.
On registration of your limited liability company, which usually takes 10 working days, you will be issued with a Certificate of Incorporation. This must be displayed prominently at the company’s registered or principal office and in every branch or premises. In addition, if you choose to buy a pre-existing company to use for your business it can cost up to €200 or to form a company though a solicitor can cost up to €500.
D. Co-operative
A worker co-operative is where a team comes together to form and run a business according to a set of values that include self-help, self-responsibility, democracy, equality, equity and solidarity. The business is jointly-owned and democratically-controlled, unlike other more hierarchical business structures. Co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.
Co-operatives can be registered as an Industrial & Provident Society, a company limited by guarantee or a company limited by shares.
IMAGE: Signpost for a town called ‘Startup’ – image credit: Mike Dierken/Flickr
FRG Enterprise Services
Eoghan Brunkard is one of our two enterprise officers here at the Fountain Resource Group, the only official Department of Social Protection (DSP) enterprise officers for the South Inner City (the Larkin Centre covers the Northside). Since 1991, we have helped over 2,500 clients to start their own businesses via our enterprise services. Click here for more info>