Setting up a business
There are three ways in which a business can be established in Ireland:
- Sole Trader
It is relatively straightforward to establish yourself as a sole trader in business, and you simply need to ensure that your PPS number is registered with the Revenue Commissioners for trading and that you separately register for VAT if your turnover exceeds the thresholds.
If you are using a name other than your own name, you must register the name with the Business Names Section in the Companies Registration Office. You are in control of the destiny of the business as you are the sole proprietor of the business.
However, the main difficulty with being a sole trader is that there is no difference between you and the business. Therefore, any losses which you incur in your business cannot be separated from your personal assets, and if the business fails, then your personal assets and family home will be at risk.
Your solicitor can advise you about the legal pitfalls to be avoided if you trade as a sole trader.
A Partnership exists where two or more people come together to form a joint business enterprise.
A Partnership Agreement is a document that sets out the rights and obligations of the partnership and the important legal details about what happens to the business of the partnership if one partner dies or wants to leave: for example, how do the remaining partners value his interests? It is therefore very important that you obtain advice from your solicitor when entering into a partnership.
If there is no documentation governing how the partnership should be established or run, it is known as an “informal partnership”, but it is still legally speaking a Partnership and governed by the Partnership Act.
If a Partnership Agreement is executed to establish the partnership for a limited period of time or a limited function etc. this is known as a ‘fixed term partnership’.
Partners are, in the absence of any documentation, jointly and severally liable to discharge all debts incurred by the partnership. This holds a significant risk, as, if one partner runs up significant debts on a bad investment or if he is sued, the other partners could then be legally liable to pay “his” debts.
Certain professions are not entitled to trade via a company such as doctors, lawyers, dentists, vets and accountants. If two or more professionals in any of those areas wish to work together, then they must do so as a partnership.
There are tax disadvantages for both partnerships and sole traders. Generally speaking, once a business has two or more people working in it, in an ownership capacity, your accountant will usually suggest that a corporate structure would be better suited to the arrangement.
There are a number of different types of limited and unlimited companies in Ireland. Choosing the correct type of company and its structure and shareholding is a very complex area of the law and one which needs to be discussed in detail with your solicitor.
It can be of great benefit to shareholders, in particular, Minority Shareholders, for a Shareholders Agreement to be put in place. This can define the rights of different shareholders to nominate a Director or the percentage vote that is required for the Company to borrow money or buy or sell its primary assets. It is highly recommended that shareholders enter into a Shareholders Agreement when incorporating a Company or as a requirement before investing in a Company.
Once incorporated, a company is a separate legal entity to its shareholders. It can buy and sell property, hire and fire employees and it can borrow money. Generally speaking (although there are certain important exceptions which your solicitor can discuss with you) the debts of a limited company are not the debts of the individuals behind the limited company and in the event of business failure (again, subject to limited exceptions) the company itself is liable for all the debts and not the individuals behind the company.
For this reason, lending institutions always try to obtain a personal guarantee from directors/shareholders over company debts. This is not an ideal option.
Closing a business and Liquidation
As there is no difference between you as an individual and the business which you have established, it is vital that all debts of the business are discharged, failing which creditors of the business will pursue your personal assets. Once you cease to trade under the name which you may have already registered in the Companies Registration Office, you need to file the relevant documentation to indicate to the Companies Registration Office that you have ceased trading under the relevant name.
Dissolution of a partnership is a complicated process. You should seek advice from your solicitor in relation to this to make sure you are properly advised on the legal and tax aspects of a break up of a partnership as there are very serious ramifications if this is not addressed properly.
There are separate procedures involved in relation to the closure of a company depending on whether the company is solvent (i.e. able to pay its debts) and insolvent (unable to pay its debts).
Your solicitor and accountant can advise you as to the steps that have to be followed. The insolvent winding up of a company can have ramifications on shareholders (in certain unlimited circumstances) and directors (reckless trading, fraudulent trading, disqualification orders prohibiting the directors concerned from being directors of other companies in the future for a limited period of time).
If you are a sole trader and become involved in a business dispute, your personal assets will be at risk if you lose the Court case. Other than that, there are no complicating factors for Sole Traders with commercial disputes.
It is complicated and inefficient for an informal Partnership with no documentation to resolve a dispute between its partners. This is because, in the absence of any documentation, there is no agreed mechanism for disputes to be resolved. Generally, partnership disputes where there are no partnership agreements will end up in the Courts which is an expensive and very public venue to resolve disputes. It is therefore in your interests to have your solicitor prepare a robust partnership agreement dealing, in particular, with dispute resolution.
Once established, a Company is governed by its constitution and any Shareholders Agreement. These will identify the types of business the company may or may not do and will also determine the relationship between the shareholders themselves, between the shareholders and the board of directors and between the shareholders and the company. In the event of a dispute with the company, it is the company itself which is the party to the proceedings and not the shareholders or the directors of the company (subject to very limited exceptions).