Want to be your own boss, looking for a better work/life balance or maybe you were forced into action by redundancy. Whichever category you fall into starting up in business can seem like a daunting process for some people, however, it doesn’t have to be this way.
With some careful planning and a little help from the experts along the way, you can begin your new adventure sooner than you think. Here are pointers on some legal and tax issues.
The first thing to consider is how are you going to trade, we give a brief description of the three main types of entity below:
Firstly you may choose to operate as a Sole Trader. This simply involves registering as such with the Revenue Commissioners and submitting an Income Tax return once a year in October to cover the accounts ending in the previous calendar year e.g. October 2013 return for period Jan-Dec 2012. This type of structure might appeal to a smaller business starting off as the compliance requirements are more straight forward and should result in lower accounting fees, however you will miss out on some advantages of having a company.
A partnership is a combination of two or more people who join forces to start a business. Every partnership should have an agreement in terms of how profits are shared out. From a tax perspective each member of the partnership is treated as a sole trader and has to also submit an annual income tax return.
Alternatively if you are more ambitious you may prefer to register as a Limited Company which effectively creates a separate legal entity. This has the benefit that the shareholders’ (your) potential liabilities, should the company cease to trade, are limited to the amount to which they originally subscribed for share capital.
However Limited Companies and their Directors are subject to more compliance requirements than a Sole Trader. A Limited Company is required to produce a set of statutory accounts every year which have to be submitted to the Companies Registration Office (CRO) along with an Annual return. There is also a requirement to submit a Corporation Tax return to Revenue on an annual basis. Finally Directors (owning 15% or more) need to file an income tax return annually.
If you are fortunate enough that your company is making more money than you are taking out of the company as salary then this is where one of the main benefits of a Limited Company comes into effect. Any excess (i.e. profit) the company makes is taxed at the Corporation tax rate (currently 12.5%) rather than the potential Income tax rate of 20% or 40% a Sole Trader would incur. These rates rise to 31% and 51% when you include PRSI and USC.
Here is a link to a previous mind map blog we put together for the differences between the different entities. Our next blog will look closer at the different taxation treatments.