Sole Trader or Company - Need some advice

ExcaliburRisen

I know this has been asked lots of times and I have done a search of existing threads but haven't found one that answers my question.

I am in the process of setting up a business to sell Private Label physical products on Amazon.com. The plan is to start off small with one product and then scale it up from there.

My question is should I start off as a Sole Trader while the Business is small and then convert to a Company if the venture is successful and profits are growing?

I realize that a Ltd Company will offer Limited Liability but I plan on taking out Liability Insurance regardless of whether I go Sole Trader or Ltd Company.

I have already spoken with two Accountants. One said start off as Sole Trader while the other recommended Ltd Company. Hence my confusion.

Help!!!!

Start off as a sole trader unless you think you will have a turnover of I think more than E35000 in the first year

pedroeibar1

Help!!!! wrote: »

Start off as a sole trader unless you think you will have a turnover of I think more than E35000 in the first year

Turnover relates to VAT registration, it has nothing to do with limited liability or sole trader.

It is apparent from repeated posts that the structure to use when starting a business is unclear. The post below is my effort at showing the options available. If anyone has suggested additions/deletions please post. (When finished the Mods can consider making it a sticky?)

Starting a business – what structure to use?
Many people starting out in business are unsure of the structure to use or its suitability. Below is a general overview of the main types that should be considered. The costs involved with creating and running each format need to be measured against its benefits and disadvantages.
What are other people doing? In round figures - in Ireland there are about 270,000 VAT registrations. Included in this are 160,000 private limited companies, 20,000 various other types, about 10,000 companies in liquidation, about 900 partnerships and more than 70,000 sole traders / professionals / farmers, etc. So what do these business types mean?

Sole Trader.
A sole trader is just that. It is Joe Bloggs working under his own name, it is not “a business”, and does not have a separate identity ( a “legal personality”) Simply, the business is Joe himself.

Sole Trader using a Business Name
If you call your business activity a name different to your exact name you will need to register that business name with the Companies Registration Office (CRO). If, for example, you are Jane Smith and call your business activity (physical or online) “Jane’s Gifts” you are legally obliged to register the name “Jane’s Gifts” and your details with the CRO. Additionally, should you want to buy an .ie domain you will need to register the “Jane’s Gifts” business name before your request can be processed. The cost is €20 for CRO registration and it takes about 3 weeks to finalise. The trading style of the activity will be Jane Smith t/a Jane’s Gifts or Jane Smith trading as Jane’s Gifts. Legally there is no “business” - Jane Smith t/a Jane’s Gifts is no different to Jane Smith.
Advantages – this is the simplest, cheapest and most basic way of starting a business. Other than the usual tax returns there are no other forms to file. Suppliers might see you as a better risk for extending credit, as you are personally liable for all debts. Later if the business activity grows you can convert to a Limited Company should a need arise.
Disadvantages – The business is YOU – it does not have a separate legal ‘personality’, so you can be sued personally and you are liable for the full debts and any damages awarded. (Insurance can give some protection.) If you run out of cash and cannot pay your creditors, they can sue you, force the sale of any/all assets you own and bring bankruptcy proceedings against you. Should you wish to sell the business activity, it is regarded as an asset sale and usually that is more difficult/complex than selling a company.
Why bother being a sole trader? – It is simple, easy and cheap, so this is an ideal way to start small. It is however important that you minimise your risk and buy appropriate insurance (e.g. liability cover) to protect yourself.
Tax - The income of a sole trader is taxed after the usual allowances. If the sole trader already has another job as a PAYE employee, and starts a business activity e.g. selling on eBay, that profit is added to PAYE income, declared and taxed accordingly. There could be VAT registration applicable, depending on type of activity, turnover, sector, etc.
For more information, see here https://www.cro.ie/Registration/Business-Name

Limited Company.
The private limited company is a very common entity used in Irish business.
There are several different types of limited company but there is considerable common ground between them.
The simplest is a private limited company and it can have just one director but it must have a separate secretary. It has a simple constitution (no need for a Memorandum and Articles of association (M&A) and is easier to manage administratively. The company name is followed by“Ltd.”
For more complex or bigger businesses the next type is the Designated Activity Company. It is limited by shares and must have at least two directors. It has a M&A with defined objects. The company name is followed by “DAC”
A company is a separate legal entity in its own right (it has “legal personality”) so it is liable for its own debts. It can sue to enforce its rights or be sued to meet its obligations. It can be sold, or enter into contracts e.g. borrow money. A company is formed by “promoters” and its shares are owned by its shareholders whose liability, should it fail, is limited/protected.
In a start-up company, the promoters frequently can have several roles – each could be a shareholder, a director and an employee. Each role has different rights and obligations under law. It is very important to understand that the directors are in a position of trust, and have a fiduciary duty to the company. The law governing companies in Ireland changed considerably with the introduction of the Companies Act 2014 which commenced on 1 June 2015. Generally speaking, the first part of the new Act applies to all companies, the second part applies only to big companies, so it is a huge improvement on the numerous Acts that it replaced. Every director should be aware of his/her obligations – see http://www.odce.ie/Portals/0/Documents/FAQ/Directorship%20of%20a%20company/Company_Directors.pdf
For any new company involving more than one shareholder it is critically important for its success that there is a written shareholders’ agreement, setting out who does what, when, how and where. Any issues that arise between shareholders will be avoided if a shareholders agreement in place from the outset and problems will be avoided. The shareholders’ agreement should specify how to handle differences, key business issues such as borrowings, dividends, the exit of a shareholder (particularly on disposal of shares), etc..
Promoters can set up a new company themselves but it is much more efficient (and probably cheaper in the long term) to use a company formations business – there are several operating in Ireland and the cost should be about €250. A company must have a registered office where official documents can be delivered/served. This can be you home address but if you are a renter a clause in your lease usually prevents this. Accommodation addresses can be hired or your solicitor/accountant might help.
Advantages – There are several advantages to incorporating a business, inevitably the most important is seen as limiting the liability of the promoters. Sale of the business is easier, as ownership is simply transferred (choice of share sale or asset sale). In the event of the death of a shareholder, the shares can be transferred as the company continues to exist. Sometimes there can be taxation advantages.
Disadvantages – paperwork, the need for which is more onerous as the company is an entity in its own right. A Limited Company must every year have meetings and keep records/minutes of what takes place. It must file an Annual Return on its Annual Return Date (ARD) and its (abridged) accounts must also be filed. There is an audit exemption for small companies. Miss the ARD and there are fines/late filing fees. Because of the limited liability rule, Banks will usually look for personal guarantees. Similarly, investors might look for warranties or guarantees that could create a personal liability. The Office of the Director of Corporate Enforcement was established with the specific role of supervising compliance with Irish company law – if a director operates illegally s/he is liable to prosecution and sanction.
Why bother using a Ltd. Company? – The advantages far outweigh the disadvantages once a business reaches a certain critical mass.
Tax – the company will pay tax on its profits. Employees will pay PAYE. Shareholders will pay tax on dividends received.
For more info see here https://www.cro.ie/Registration/Company

Partnerships
The word “partner” is possibly the most misunderstood and misused word in the business vocabulary. Invariably it is incorrectly used to describe a co-shareholder in a company.
As a general rule, partnerships are unsuited to most business activities, and in Ireland have long fallen out of favour. For example architects regularly used them, but the crash in 2007/8 showed how flawed the partnership model was and those firms that survived rapidly incorporated and now are Ltd. companies. (Bloxhams, the stockbrokers is another good example of the dangers of a partnership - go Google it and frighten yourself on ever using a partnership structure!)
When two or more people formally or informally join together in a business venture without forming a company, they can be deemed to be a partnership and are subject to the Partnership Act, 1890. A sole-trader type business (e.g. a shop) involving family members working in the business could be construed as a partnership if no company has been created. That is not a happy place to be unless you fully understand the position on your liabilities and are content to accept it. A partnership does not have its own separate legal personality, so all partners are jointly liable for the contractual obligations of the partnership and in certain situations can be jointly and severally liable for its debts. That means the partner with the most money is most at risk. This risk can in some circumstances be reduced by forming a “limited partnership” (governed by the Limited Partnerships Act 1907) under which a limited partner will not be liable for the debts or obligations of the partnership beyond the capital s/he contributed. HOWEVER if a limited partner takes part in the management of the partnership, s/he could lose the limited liability and be liable for all debts and obligations of the firm incurred for the period while s/he so takes part in the management.
Partnership Advantages – There can be certain tax, accounting and non-disclosure advantages (e.g. not filing financials).
Partnership Disadvantages – Partnerships have considerably more onerous liability for a partner when compared to the protection afforded to a shareholder by a Limited liability company structure. Exiting a partnership is not easy as the only "purchaser" of your role must be the other partners. "Partnerships" cannot borrow, the loan is in the joint & several names of the partners. Partnerships cannot own assets, they are owned by the partners individually. Also, there can be a negative impact on succession planning structures, particularly if no formal/written partnership agreement is in place.
Why bother with a partnership? – there are some (very few) reasons to use a partnership, usually following specific advice from a senior tax accountant/lawyer.
Tax – Complex, depends on many factors, professional advice required.
For more info see here https://www.cro.ie/Registration/Limited-Partnership

Finally, if you have a special “catchy” name for your business you should consider registering it as a trademark to protect it. See http://www.patentsoffice.ie/en/trademark.aspx


All the above does not constitute legal advice; however, it gives a fair and general representation of the advantages/disadvantages of each business structure.

ExcaliburRisen

Pedroeibar1 - Thanks for that. It was very informative and will certainly aid in my decision regarding Sole Trader or Ltd Company.

John368

pedroeibar1 wrote: »

Sole Trader.
A sole trader is just that. It is Joe Bloggs working under his own name, it is not “a business”, and does not have a separate identity ( a “legal personality”) Simply, the business is Joe himself.

Surely this cannot be correct. Many sole trader businesses are quite large having dozens of employees. Are you saying that these are not businesses?

The sole trader term refers to who or what is ultimately responsible for the debts of the business, namely a single person. That person is personably responsible for the debts. A company (ltd or unlimited ) is an entity which is set up and is responsible for the debts and it is not at person or persons who are responsible for the debts. With a partnership there are two or more people who are responsible for the debts of the business. You can call a sole trader business a firm or just a business, but you should not call it a company or of course a partnership..

John368

pedroeibar1 wrote: »

Sole Trader.
A sole trader is just that. It is Joe Bloggs working under his own name, it is not “a business”, and does not have a separate identity ( a “legal personality”) Simply, the business is Joe himself.

Surely you mean they are not "companies" rather than "not businesses" Many sole trader businesses have very large turnovers and dozens of employees after all. You can hardly say they are not businesses.

John368

pedroeibar1 wrote: »

Sole Trader.
A sole trader is just that. It is Joe Bloggs working under his own name, it is not “a business”, and does not have a separate identity ( a “legal personality”) Simply, the business is Joe himself.

.

I think you mean that they are not "companies" rather than not "businesses". There are many sole trader businesses which have large turnovers and dozens of employers. You can hardly say that they are not businesses.

John368

Someone said above that a sole trader is "not a business". That is true as a sole trader is a person but I have come across people who think that sole traders cannot say they run a business. In fact some sole traders run some quite large businesses and employ many people. Sometimes it is a good idea to call those businesses sole-trader businesses. They can also be called firms but cannot be called companies or of course partnerships. Well that is the lecture over, I will continue with digesting that dictionary I swallowed this morning!

pedroeibar1

John368 wrote: »

Surely this cannot be correct. Many sole trader businesses are quite large having dozens of employees. Are you saying that these are not businesses?

I am correct and size is not a factor. A sole trader does not have a "business" - s/he has a "business activity". It is not a "business" because the activity has no legal personality, i.e. it cannot sue or be sued. Any legal action has to be taken by or against the sole trader. Any employees are working for the sole trader, not a "business".

Edit - reading your above posts, they are wrong because you clearly do not understand the difference between a business and a business activity.

pedroeibar1

Wrong on other issues above also.

John368 wrote: »

A company (ltd or unlimited ) is an entity which is set up and is responsible for the debts and it is not at person or persons who are responsible for the debts

A company, limited or unlimited is contractually liable for its debts. A Limited company limits the liability of its promoters, an unlimited company does not, so its promoters ARE liable. Furthermore, in certain circumstances the directors of a limited company can be held liable for the debts and are not protected by limited liability.

John368 wrote: »

With a partnership there are two or more people who are responsible for the debts of the business.

Not quite. It depends on the type of partnership; also, the liability can be joint or several, which means the deep pockets are first chased.

John368 wrote: »

You can call a sole trader business a firm

No, it is incorrect to call a sole trader a “firm”, which is correctly used to define a business organization, such as a company or partnership and not an individual.

John368

pedroeibar1 wrote: »

Wrong on other issues above also.

.

No, it is incorrect to call a sole trader a “firm”, which is correctly used to define a business organization, such as a company or partnership and not an individual.

I did not call a sole trader a "firm". Read what I said.

John368

With all due respect to the poster who has said that I have given incorrect information to the other members of this forum, I would respectfully point out that you can only say that I am incorrect if you assume that I am using the word "business" in the narrowest sense, i.e. that of a legally formed entity such as a Ltd Company. The word "business" has a very wide definition and I believe the use of the term "sole-trader business" is a legitimate term that can be used in the context of this thread. Perhaps my picking out such a seemingly small part of a very comprehensive description of different types of trading and trading organisations, might seem quite picky on my part, but is was done in the spirit of helping members and I couched my wording without the resorting to absolutes such as "you are incorrect".

pedroeibar1

John368 wrote: »

I did not call a sole trader a "firm". Read what I said.

John368 wrote: »

…………. You can call a sole trader business a firm or just a business……..

QED.

John368 wrote: »

With all due respect to the poster who has said that I have given incorrect information to the other members of this forum, I would respectfully point out that you can only say that I am incorrect if you assume that I am using the word "business" in the narrowest sense, i.e. that of a legally formed entity such as a Ltd Company. The word "business" has a very wide definition and I believe the use of the term "sole-trader business" is a legitimate term that can be used in the context of this thread. Perhaps my picking out such a seemingly small part of a very comprehensive description of different types of trading and trading organisations, might seem quite picky on my part, but is was done in the spirit of helping members and I couched my wording without the resorting to absolutes such as "you are incorrect".

The “context” of the thread is to provide accurate info on corporate structure. Advice was given on that, some correct, some inaccurate.
There are legal definitions of what constitutes a “business”, a “business activity”, a “Sole Trader” etc. etc. Get it wrong with the Revenue, auditors, bankers, whoever, and “context” will be out the window.

It is obvious from the thread what comment is worthwhile.

hytrogen

I'm in a similar position to OP in forming a startup.
So if I were to be sued as a sole trader that then would be me & my assests (house, car, bank accounts) being sued, is that correct?

pedroeibar1

hytrogen wrote: »

I'm in a similar position to OP in forming a startup.
So if I were to be sued as a sole trader that then would be me & my assests (house, car, bank accounts) being sued, is that correct?

Yes you would be sued personally and all your assets would be at risk

John368

pedroeibar1 wrote: »

QED.


The “context” of the thread is to provide accurate info on corporate structure. Advice was given on that, some correct, some inaccurate.
There are legal definitions of what constitutes a “business”, a “business activity”, a “Sole Trader” etc. etc. Get it wrong with the Revenue, auditors, bankers, whoever, and “context” will be out the window.

It is obvious from the thread what comment is worthwhile.

What is the QED about. I did not call a sole trader a business . I mentioned "sole trader business". Are you going to pick holes in that and as well. Perhaps you are going to argue that I should have called it a "sole-trader business". Hardly a hanging offense.

pedronomix

The person and the Business are one and the same in the case of a sole trader or persons in the case of a partnership. Adding the word business to the term sole trader is unnecessary verbiage that only adds confusion!