Before we kick off with the technicalities, there’s a few terms to be aware of when it comes to structuring your business to suit your purpose.

Partnership – if team sports have always been your jam then this model might just be the perfect collaborative fit for you.

Limited Company – looking to hand over things to a higher power? Well, registering your business in this way places it as a separate legal entity that’s responsible to the shareholders.

So now the basics have been covered, it’s time to dive headfirst into the nitty gritty. Let’s really explore what each of the above mean and how they might change the way your business operates for the better!

First up… the sole trader:

Should you choose to go it alone, you need to be aware that liability for income tax on all the business’s yearly profits, will fall on your shoulders. Note, this will be taxed at your marginal tax rate and is subject to normal income tax rules.

So what goes into the tax return and how do you keep on top of it? Let’s start with the components of an income tax return:

• accounts prepared based on the income and expenses of the business;
• the resultant profit;
• an extract of the accounts is also included.

Now that’s sorted there’s some more things to consider after understanding the above. If you’re likely to hit the higher income tax rates it might make more sense to register as a limited company. If you need all or most of the funds generated from the business then this could suit.

You’ve decided sole trading is for you, what’s next?

1. Register for income tax with the Revenue commissioners. This is separate to your registration under the PAYE system when in employment. To do this you must be resident in the state and have permission to work in Ireland if you’re a non-EEA citizen.
2. Know that: pension contributions, as for all individuals, are deductible from your income subject to maximum contribution rates.
3. If you want to use a trading name rather than your own, you can register a business name with the Companies Registration Office for a small fee. This new name is not legally protected and someone may be able to use a similar name. Ultimately, your business is in your own name and you’re personally liable for it
4. Know that: your profitability information isn’t publicly available as it’s only included on your personal tax return.
5. Know that: as you are not creating any legal divisions between you personally and your business you don’t have the protection of limited liability so personal assets can be used to settle debts.

Need a little more convincing? Sole trader businesses are easy to set up and wind down, much more so than the other options.

Next… partnerships:

What are we talking about here? A formal legal agreement where two or more parties run a business together and share the profits.

Let’s talk about tax. The partnership is registered separately with the Revenue and so, is required to complete an annual return – showing the profits/losses and allocation of these between the partners. But, be aware the profits are included in the individual personal tax returns of the partners and are subject to personal income tax rates.

Why do it? Well, we all know the saying ‘teamwork makes the dreamwork’ right. This is essentially a way to share the load. Split the burden of running the business in two or more rather than managing stress by yourself here.

Once you’ve decided you want a business buddy alongside you, you’ve got two options to explore:

1. General Partnership

• All members of the business equally share responsibility for running the business and also the resultant profits.
• Similar to sole traders, the partners are liable for losses and debts incurred by the business.

2. Limited Partnership

• A limited partner can restrict their responsibility for liabilities to the amount they have invested in the business. This means their personal assets are not at risk.
• This is often known as a silent partner. While they’ve invested in the business, they don’t normally provide any support or exercise any influence on the running of things.

And finally… the limited company:

An entirely separate legal entity, in this model you can appoint yourself as a director. You’ve got options including being the sole owner with limited liability – which means you’ve some legal protection against personal liability.

We’ve put this one last as it’s a potential decision to make further down the line. It’s very possible to start as a sole trader or partnership and change to a limited company once the business grows.

Now let’s dive into making this happen for your business in a few simple steps.

1. A new company will need to submit forms to the Companies Registration Office (CRO) (which’ll take a few weeks to formalise). You can choose your company name subject to some restrictions and this name will be partially protected – no one else will be able to use it.
2. This company type must have at least one director and a separate company secretary. The secretary should have some experience in this type of role. Directors have fiduciary duties (legal obligation) to act in the best interest of the company.
3. As a separate legal entity, the company will have a number of corporate filings and deadlines. There are fines and penalties for failing to comply, some of which have implications in subsequent filings. These requirements may bring additional costs.

Downsides of all this? It can be slower and more expensive to set up and wind down a limited company.

However, you shouldn’t let that stop you. One of the advantages of a limited company over a sole trader or partnership, is its ability to keep money in the business. Corporate tax rates are lower (currently 12.5%) and so will work in your favour for as long as you’re happy to leave your funds in the business.

Delving deeper, you need to know that in a company, you can opt to take a salary, dividends and contribute to your pension.

How will this effect tax? Your salary and/or dividends will be taxable in your personal income tax return. However, the salary and any company pension contribution are deductible expenses in the company resulting in a reduction in the company’s tax bill.

Saving for the future could be helped by transforming your business into a company because it could now make contributions to your pension – in addition to any personal contributions you make out of your salary. There’s no limit on the amount the company can contribute and it’s fully tax deductible in calculating the company’s tax bill.

Notes before you go…

All businesses – whatever their structure – may be required to register for a number of taxes depending on their circumstances.  These include:

• VAT;
• PAYE;
• Income Tax;
• Relevant contract tax;
• Corporation tax;
• Dividend withholding tax;
• Capital gains tax.

For more information on all of the above check out our previous blog on taxes you might be responsible for as a business owner.