Legal structure of setting up a business

One decision that must be made at a very early stage is the legal framework within which you will want to operate your business. This section covers the three basic forms of private enterprise organisation.

Sole Traders and Partnerships

Most people commence business as a sole trader or if there are two or more persons jointly pursuing a business enterprise they may do so as a Partnership.

SoleTrader

You automatically become a soletrader by starting a business on your own. Setting up as a soletrader requires no legal fomalities apart from registering with the Registrar of Business Names at the Companies Registration Office (http://www.cro.ie/) which is optional. An advatage of being a Soletrader is that apart from making normal tax returns, a sole trader is not required to make public any information about their business. The disadvatage of operating as a soletrader is that you have no protection if the business fails. All personal assets become available to pay off any outstanding creditors. Operating as a sole trader involves very little formality, apart from keeping such records and accounts necessary to inform you as to the amount of expenses and income being generated by the business and to budget for a satisfactory continuation of the business and to satisfy the Revenue Commissioners as to the profit or losses being generated and to comply with the relevant taxation requirements.

However, while sole traders and partnerships can operate with very little formality and relatively few legal restrictions the greatest single disadvantage is that if the enterprise fails, then the sole trader or in the case of a partnership the individual partners become personally liable to their creditors.

This liability extends to all of the individuals personal assets (including a family residence and motor car etc). The Limited Liability Company protects the individual trader from this personal liability by separating the business assets from personal assets.

Partnerships

The partnership may have a formal written agreement setting out the Rules for conducting the business as between partners or as in many cases may operate without any formal written agreement and simply share the profits of the business. To avoid disputes it is always advisable, that partners should have a proper agreement drawn up by a Solicitor setting out in precise terms the rules on which the partners agree to operate the business.

Limited Liability Company

A limited Liability Company has a legal identity that is entirely distinct and separate from that of its individual owners (called shareholders).

Any two or more persons can form a Limited Liability Company. Normally the individual trader or partners will get their Solicitor or Accountant to form a Company for them by completing the necessary Forms and Affidavits required by the Companies Office and paying the appropriate Stamp Duty. The formation of a Company is relatively inexpensive and speedy.

In the case of the business failing the creditors only have a claim for the extent of the assets in the Company.

However, if the Company owners wish to borrow money the lending institution will require there to be sufficient assets in the Company to secure such borrowings or alternatively will require personal guarantees from the owners.

The disadvantage of forming a Company is that the Company is required to make detailed returns to the Companies Office annually and failure to make these returns is a serious offence and can incur heavy fines.

Also a Company has a continuous existence apart from its shareholders and on the death or resignation of a shareholder, another shareholder may be appointed to replace that shareholder. On the other hand if a sole trader dies the business comes to an end and may have to be sold to satisfy claims against the deceased's estate.

The taxation rules for companies differ from the rules for sole traders and partnerships and before taking any decision to form a Limited Liability Company, the trader should firstly consult with his Accountant as to tax implications.

Another advantage of a Limited Liability Company is that the business can be easily transferred by simply transferring the shares in the Company thus avoiding formal conveyance of title to company property.

Registration and other useful information including forms can be obtained from the Companies Registration Office website http://www.cro.ie/

Further information on the legal and regulatory requirements of setting up a business can be found on the Basis website (Business Access to State Information & Services).