DCA Q&A: HOW SHOULD WE SET A NEW COMPANY UP?
A client of ours wants us to go into business with him. He currently operates as a sole trader while our company is set up as a partnership agreement, with three partners involved. We’ve obviously discussed the opportunity at length between ourselves and it sounds like a great chance for us to grow our business. However, our client wants us to set up a new company so as to make everything transparent and above board. We’re fine with that but we were wondering how it effects our current situation. For example, are we exempt from corporation tax with the new company under the new rules despite the fact that we’ve been operating our own business for four years now? As I mentioned, we’re very keen to enter into business with this client but we want to make sure that we’ve set it up properly from the outset. Can you advise us on how we should go about it?
From the information that you have provided here I think the cleanest way of doing this is to set up a limited company whereby all parties involved decide on a share split. From a legal perspective, if things don’t work out or if the business doesn’t grow to where you would’ve liked it to after a certain period of time, it’s a lot easier to wind up. Hopefully that won’t be the case for you but as a legal entity, there are very defined constraints in terms of who owns what and what the company can actually do in an incorporated structure. If one party decides further down the line that they want out, it’s much easier to buy shares from a limited company than to organise a buy-out in a partnership arrangement, for example.
If you do decide to incorporate the company, ensure that there is a shareholders agreement in place from the outset. This basically sets out the rules and guidelines of how the business is run and in the event of a disagreement between the parties involved, it can prevent an escalation of legal proceedings as the rules are defined at the very beginning and everyone involved is aware of them.
Another option available to you is to set-up a Joint Venture (JV). Here, you will have to register another entity for tax. While, on the face of it, a JV is similar to a partnership, from a legal point of view they are very different things. For example, with a partnership, you have to make sure that all ends are tidied up – if it’s left open-ended and a partner hasn’t been moved on or hasn’t terminated his/her position within the company, in theory, he or she is entitled to a percentage of the profits earned for the rest of time. However, if the new company is set up as a JV, it protects both parties from the new business encroaching on the other companies that you both already have.
I would advise setting up a limited company here on the basis that it’s tidier and it’s easier to wind up if things don’t work out in the future. Also, it offers limited liability so nobody involved will be personally liable for the any debts accrued.
The downside is that a limited company is more expensive to run from an accounting and administration perspective – at the end of the year you can expect to add on an extra €1,000 for accounting services. However, there are a lot more tools available to lower tax liability with a limited company so the net financial gain will probably outweigh the extra costs.
You will also qualify for a corporation tax exemption given that you are setting up the company this year. Minister Noonan announced that the three-year exemption for start-ups is to be extended for companies that commence trading in 2012, 2013 and 2014 in an effort to encourage entrepreneurship.
Best of luck.
Declan Dolan,
Partner,
DCA Accountants and Business Advisors.
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