INNOVATION MASTERCLASS:Part Two: Going it alone or incorporating your business
YOU'VE GOT your business idea, done the research and you're ready to go. But before you start trading, there's one outstanding question - just how exactly are you planning to trade? Are you going to operate as a sole trader or are you going to incorporate your business?
"For any serious business you need to be a limited company both in terms of perception but also in terms of protection," says Brian O'Kane, author of Starting a Business in Ireland and managing director of Oak Tree press. "The downside of being a sole trader is there is no distinction between you and the business and if something goes wrong with the business and the business can't pay money back, you have to pay it back. Most people don't see that risk."
In other words, as a sole trader your personal assets are at risk, that's not the situation for a limited company.
But he cautions business promoters that limited liability does not give them protection in all circumstances - if you trade recklessly then the protection of the company no longer exists.
Another major benefit of trading through a limited company is the commercial protection offered to shareholders from creditors and potential litigation claims, according to Niall Hughes, accountant and business advisor with Hughes Blake.
Incorporating your business has many tax advantages, chiefly you can be taxed at corporation tax rates rather than income tax rates which saves a lot of money, says Hughes.
However, the decision to transfer a business to a company should be based on sound commercial reasons, not short-term tax saving. There is a very simple test to assess whether a business is at the size to transfer to a company status, according to Hughes.
"If a small business gets to a stage that it is making more money than the promoter is spending on his or herself, it may be the time," he says.
"Say, for example, they work out that they need €60,000-€70,000 a year to live and they have profits in their business €140,000-€150,000. They pay tax at 41 per cent, plus PRSI which is 47 per cent, on all of that profit they are making and what they need to be doing at that stage is sheltering it into a company structure."
The lower tax rate is also a very important factor in cases where the owner does not intend to withdraw all of the profits from a business for his or her personal purposes on a year-by-year basis and allows the promoter to build up wealth in the company, essential for many start-ups.
The costs and obligations associated with being a limited liability company are not very onerous, he says, adding that the process of incorporating is clear-cut.
"It is relatively straightforward. It costs about €60 or €100 if you do it online. You fill in a form with the name of the company you want, who the original shareholders are, the directors and you put in your memorandum and articles of association," he says.
You will also need a solicitor's signature stating that you comply with the law and that you are operating a business within the state.
For those who don't want to do it themselves, there are a number of firms specialising in company formation, such as formacompany.ie and Business and Company Formations Ltd.
Formacompany.ie will prepare all the relevant documents for filing for a €280 fee and incorporation takes three to five days.
"There are enough risks in business without exposing yourself to anymore than you need to and the costs involved in setting up a limited liability company and ongoing obligations are not that great in contrast to the protection you get," says O'Kane. "I would advise everyone to do it because of the protections you get."
FORMING A COMPANY WHAT YOU NEED
Company nameThis is the name of your business. There are some restrictions, the main one being that it must be unique. The first thing to check with a company formation is the name you wish to incorporate. The Registrar of Companies will only refuse a name if it is identical, or almost identical or phonetically the same as a name already registered or implies state sponsorship.
Company registered officeThis is the official address of your business where all official documents are served. It does not have to be your trading address but it must be located in Ireland.
Two company directorsIrish companies require the address, date of birth of each director and any other directorships, of at least two individuals, over 18, with one director being a permanent resident of the country.
Company secretaryIrish companies are required to have a company secretary who has the legal duty of filing all required documents and accounts. This may be an individual in which case their personal details are required, or a corporation in which case it's name and registered office.
Principle activitiesThe companies purpose must be outlined in its Memorandum and Articles of Association and given a corresponding NACE code. Formacompany.ie do this for you.
Source: www.formacompany.ie
