To incorporate or not to incorporate – that is the question

Choosing the correct business structure is incredibly important. There is no straightforward solution to this quandary. This post is going to consider the 2 most common types of corporate structure small businesses in Ireland seem to utilise: the sole trader and the limited liability company.

You have taken the leap and launched that business you have always dreamed of. Its nerve-wracking, exciting and hectic. Now you want to know the next steps, you need to protect yourself and your assets, you want to grow your business and you want to ensure you are not paying over the odds to the Revenue… Jeff Bezos started selling books in a garage, this is your time!

Choosing the correct business structure is incredibly important. There is no straightforward solution to this quandary. This post is going to consider the 2 most common types of corporate structure small businesses in Ireland seem to utilise:

  • The Sole Trader
  • The Limited Liability Company

The Sole Trader:

The Sole Trader type structure does exactly what it says, it is an individual who runs and manages a business. The Sole Trader is their business, linked both legally and financially, til death or debt do you part. 

Postives

It is a simple structure to set up, you just need to register yourself with the Revenue. Depending on how much you earn, the risk you’re willing to take, this may be the most suitable structure for your burgeoning business. Or, it might just be the correct structure choice for right now, you can always incorporate at a later date. There is much less cost and compliance with a Sole Trader compared to a Limited Liability Company.

Negatives

Other considerations include if a Sole Trader is operating under a name that is not their own, they must register that name with the Companies Registration Office (“CRO”). It’s really important to note that if your business fails and you have outstanding debts, your personal assets are at risk, that is house, car etc. Depending on the level of your income there may be a much higher tax burden as profits from a Sole Trader enterprise are taxed as income, which is likely to be over 50%. It’s more difficult to scale as a sole trader and many people like to deal with limited companies.

Limited liability company:

A Limited liability company is an entity with a separate legal personality. The primary benefit of incorporation is this limited liability, this means if your business fails, your personal assets are safe. Only the assets of the company are at risk to creditors.

An Irish limited liability company requires at least one director and a secretary who must be two different people. One person can act as a director and Secretary but then there must also be an additional director. The limited company also requires a shareholder. In many cases small companies in Ireland have the same director and shareholder. A company is incorporated through the CRO, an online form must be filed, detailing the directors, secretary, shareholders and amount of shares you wish to allot. The memorandum and articles of association must also be filed.

In terms of taxation, a limited liability company is subject to tax on profits at 12.5%, profit which can be paid out as a dividend or reinvested in the company. You can also decide to pay yourself a salary. Depending on the income of your business there are more opportunities with a limited company to decrease your tax exposure. There are also pension benefits, a director can pay pre-tax profits into a pension fund, effectively tax free. In terms of funding the business, banks look more positively on a limited company and there are more options for different types of funding. 

The downsides to incorporating as a limited liability company include the additional legal requirements such as annual return filings. financial statement filings. These have higher costs associated with them, as you’ll likely have to take on professional advisors. The public will have access to your filed financial statements. Depending on the size and type of company your financial statements may need to be audited. A company must hold at annual general meetings presenting financial statements to the sole member or the members, hold board meetings, keep minute books and registers. There are also large fines if filing deadlines are missed. Directors also have certain obligations, by agreeing to be a director on a company you’re acknowledging that you have legal responsibilities and duties to that company

We want to help you start this dream business with the correct legal tools at your disposal, company law is complicated, and we aim to simplify it. Our goal is to provide you with accessibility to the same legal knowledge we give to companies with billions in assets and help you get that start up off the ground! 

Disclaimer: Please note that Legal Diaries is not a law firm. Nothing on this site, unless otherwise state should be construed as legal advice. Legal Diaries does not provide your or your company legal advice unless otherwise communicated. We simply provide legal information and education for you to customise and use on your own and have reviewed by your own Legal Counsel. Danielle and Aisling are Barristers at Law, members of the LSRA Roll of Barristers. Unless otherwise specified Legal Diaries does not establish a lawyer-client relationship with you.

Thank you!

Make sure to check out our other Business Series Advice blogs for more tips and tricks on starting your own business.

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