Incorporating a business may be advantageous but careful assessment of the individual circumstances of each case is vital as it may be disadvantageous. Issues to consider include limited liability protection, tax rates, being a separate legal entity, statutory filing obligations and new legislation.
For example, a sole trader does not have the protection of limited liability which is the principal advantage of a registered company. Thus the personal assets of a sole trader such as their home may not be protected if employees or customers sue them. It must be noted that it is only the shareholders’ liability that is limited, as the company must treat all creditors equally and is liable for all debts and liabilities.
Another positive aspect to the incorporation of a company is the favourable corporation tax rate that applies at 12.5%. Companies avail of special tax rates and accounting procedures that usually allow a better return on their profits. They also enjoy the benefit of increased pension contributions. This is in comparison to a sole trade that is liable to tax at 42% on most of its profits and also is limited to the amount of earnings that can be contributed to pensions.
Being a separate legal entity is an additional advantage of a company. A company is regarded as including the following three separate parts: the directors, the shareholders, the company itself. This provides protection to the directors and the members, as the company is its own legal person. The directors have a duty to report to the shareholders, even though they may be the same people and they must act in the best interests of the company.
A significant factor to consider before incorporating a business is that a company must file publicly available information that allows potential business partners or customers to determine whether they may be doing business with a reputable company or not. This information is available from the Companies Registration Office which is provided in the format of the Form B1 (Annual Return) and the annual financial statements.
There are advantages to a sole trade. For example, as compliance obligations continue to increase as well as the heavily regulated environment that surrounds companies, this can deter sole traders from making the transition. By comparison, a sole trader has few administrative obligations and only has to file minimum tax returns annually, while a company has to file an annual return with annual accounts annexed, whether it is a dormant company or one that is actively trading. Companies are also obliged to file other tax returns and may be taxed heavily on the sale of certain assets, such as premises. If however, a sole trade chooses to transfer its trade into a company, subject to satisfying certain criteria, tax relief may be available.
Further obligations on company directors have resulted from the Companies (Auditing & Accounting) Act 2003. This means that directors of a company must now include a compliance statement detailing both a policy statement in the annual accounts and an annual compliance statement has to be included in the directors’ report. Interestingly, the threshold to avail of the audit exemption has been raised to a turnover of €1.5 million or less in addition to the other relevant criteria. This should enable a larger number of smaller companies to avail of the exemption from having to prepare audited financial statements.It is important to note that all companies must submit an annual return by the Annual Return Date (ARD). Failure to submit this with annexed accounts by the ARD will result in the Companies Registration Office requiring audited accounts annexed to the annual return when it is submitted. It is therefore in all companies’ interest to submit their annual returns in a timely manner to avoid extra costs associated with an audit.
It can be seen that company directors have many duties and with the Office of the Director of Corporate Enforcement actively following up on reports of companies and directors that are “behaving badly”, the advantages of separate legal personality, limited liability protection and favourable tax rates have to be compared against the high level of compliance, reporting and filing obligations involved in running a company.Donohue & Co. provides expert advice that is tailored to the needs of each individual client’s circumstances and can help you make the correct choice for your business.