Updated: Aug 7, 2020
Ireland Company Formations : The Pros, Cons and top things to watch out for.
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1. What is a company?
2. Benefits of a company
3. Drawbacks of a company
4. Beneficial Ownership
5. Company Seal
6. Key terms when setting up a business
7. Recommendation : Ltd v Sole Trader
8. Top 10 common pitfalls when forming a company
9. How we can help?
If you want to form a company from only €99, just complete this form and we will be in touch within 24 hours.
What is a company?
A company is considered a separate legal entity under Irish Law and generally has the same contractual capacity as an individual. They can take multiple forms but generally fall into one of these categories;
A. Private Company Limited by Share (LTD): This is the most common company in Ireland and may have up to 149 members. It only requires one director and has limited liability.
B. Designated Activity Company (DAC): Similar to a LTD company but requires a minimum of two directors and must have a constitution outlining the activity of the company. This type of company is more regulated than a LTD and are suited for certain bodies such as charities or management companies.
C. Company limited by guarantee (CLG) : A company which does not have a share capital and the constitution of which provides that the liability of its members is limited to such amount as the members may, in the constitution, respectively undertake to contribute to the assets of the CLG in the event of it being wound up.
D. Public Limited Companies (PLC): A company whose shares are traded on a quoted exchange. These types of companies tend to be large in nature.
E. Unlimited Companies: A company where the shareholders are liable upon the wind-up of the company. Generally, this type of company is used for confidentiality purposes as the company’s financial affairs do not become a matter of public record.
As mentioned above, most companies formed are LTD in nature and we will now outline the benefits of forming a limited company in Ireland.
Benefits of a company
A limited company are registered under Part 2 of the Companies Act 2014 and has several benefits which are outlined below;
1. Limited Liability
One of the main benefits of a Limited Company is the fact that the liability that a shareholder may suffer is limited to the amount paid for those shares. Shareholders will not be liable for company debts. This contrasts with a sole trader where an individual’s personal assets may be used to settle business debts.
2. Separate Legal Entity
A company is considered a distinct and separate entity under Irish Law. As a result, a company may exist long past the lifetime of its founders, may own its own assets, may borrow monies under its own guise and has its own sets of obligations.
3. Company Name
Once you register your company your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar.
As a sole trader, it’s possible someone else could trade under the same name as you, and you couldn’t do anything about it. This could damage your business, and in some cases, result in you having to go through the costly and time-consuming effort of changing the name of your business.
Ireland is renowned for its low corporation tax, which is at 12.5%. While this is very advantageous in comparison to other territories it is important to consider the impact of the closed company surcharge and how to go about extracting money from the business. These two areas are explained in more detail but are often overlooked by entrepreneurs and can have serious tax implications.
A company continues even if its initial founder retires, sells the business or passes it onto family. This continuity can provide individuals with a legacy as well as an asset that can be sold or passed onto future generations in a tax efficient manner.
6. Pension Maximisation
A company is a great vehicle for maximising the efficiency of a pension. Having control over what the company pays you in terms of pension and your own contribution allows you to fund your retirement.
7. Taxable deductions
A company has a lower bar for allowable taxable deductions in comparison to a sole trader.
8. Reputational Impact
A limited company tends to get more respect and commercial credence when dealing with customers, banks, suppliers and potential employees.
Drawbacks of a company
While a limited company has many positives, it is important to be aware of and understand the drawbacks associated with a Company. MyTax can eliminate the below drawbacks with various service offering if required.
1. Company compliance requirements of a company
As a company is seen as a separate legal entity, there are several rules within the Companies Act that must be adhered to. These additional rules are the responsibility of the directors of a company and are enforceable by law. For example, every company is provided an Annual Return Date (ARD) and must file a return with the CRO. It is important to note that the companies first ARD is six months post incorporation. If a company is late with an ARD there are requirements for a formal audit prior to submission of returns.
2. Steps in setting up a company
Setting up a company has various steps that must be complete prior to formal approval from the Companies Registration Office. The steps for company formation is as follows;
- A form A1 must be completed and submitted to the CRO;
- A constitution (formerly a Memorandum of association and Articles of association) must be included;
- A name must be chosen that meets CRO requirements;
- A registered office must be provided. This cannot be a PO Box and must be within the State; and
- Other specific company details (see below).
3. Closing a business
If you decide you no longer want to trade with a company and don’t want to continue with the annual compliance requirements, it is possible to voluntarily strike-off a company. This strike-off can be time concerning and involves placing an advert with a national newspaper. An in-depth guide for Company Strike-Off can be found here.
4. Additional Taxation considerations
As mentioned above, numerous tax benefits are associated with an LTD company. It is worth bearing in mind the following tax considerations when forming a Limited Company;
- Once trading, a company must register with Revenue for a suite of taxes;
- If registered for VAT, various VAT filing requirements may become due;
- Corporation Tax (Form CT1) must be filed and paid annually for a company;
- A new company has very specific rules in terms of accounting dates and tax filing dates;
- Preliminary Tax must also be paid on Corporation Tax;
- Directors are now considered accountable persons, meaning they must file Income Tax returns (Form 11) annually;
- Preliminary Tax must be paid on this;
- Other Tax considerations such as PAYE / RCT may need addressing if relevant to the business.
5. Bookkeeping & accounting records
A business is required under company law to maintain proper and accurate accounts which are then filed with the CRO. If your company has two of the following it may receive an audit exemption, meaning there is no requirement to submit audited accounts;
- Balance sheet of <€6m
- Revenue of <€12m
- <50 employees.
The audit exemption is revoked if a company is late in filing any statutory returns. Despite the audit exemption, a company must still file accounts with the CRO and these accounts are the basis of a company’s corporation tax return, so it is essential these are accurate.
6. Changes in details company
Any key changes in a business (Change in directors, issue in shares, change of address etc) must be notified to the CRO in a timely manner.
In 2019, the Register of Beneficial Ownership was introduced into Ireland. This was implemented on the back of the EU’s Fourth Anti-Money Laundering Directive which essentially requires all member states to hold adequate, accurate and current information of all beneficial owners. A beneficial owner is someone who owns more than 25% of a company.
As a result of the above legislation, all beneficial owners must register with this central register. Registration will result in certain information becoming public knowledge. If you are an existing beneficial owner, you should have registered on the RBO towards the end of 2019. All new beneficial owners have 5 months from date of incorporation to register.
If a relevant entity does not file with the RBO, it may be guilty of an offence and be liable on summary conviction to a Class A fine of up to €5,000 and on conviction on indictment to a fine of up to €500,000.
Under the Companies Act 2014, a company should have a common seal stating the companies name. The company seal is used for companies needing to certify a document. Share certificates and other company documents are required to be embossed with the company seal. A company seal can only be used with the authority of a director.
Key Terms when setting up a business
The company name will be the legal name the new company will take. The following restrictions apply to any name chosen;
- It is identical to or too similar to a name already appearing on the register of companies;
- It is offensive; or
- It would suggest state sponsorship.
Every company must have a registered office within the State. This cannot be a PO Box. MyTax can be used as your Registered Office for an additional fee if required.
All company types must have at least two directors except for Private Companies Limited by Shares (LTD companies) which may have a sole director. An individual must disclose other directorships they may hold along with other personal details.
Each company is required to appoint a secretary. This person may be a director if it is a 2+ director company. If it is only a 1-person directorate company than that person may not be a director.
Authorised Share Capital
The authorised share capital or nominal share capital is the total numbers or shares a company can issue to its shareholders according to it’s constitution. The company does not become liable for these shares until issued. Not that the Companies Act 2014 eliminates the need for an authorised share capital cap, which may save future expense in the future.
Issued Share Capital
The issued share capital is the number of shares that have been allocated to shareholders. This is also the actual amount an individual is held liable for. Unless you have any particular requirement, we suggest you issue 100 shares at a par value of €1.
The NACE code is the common basis for statistical classifications of economic activities within the E.U and one must be assigned to your business. There is a list held on the CRO.
Recommendation: Ltd v Sole Trader
Whether you choose to operate under a Ltd or Sole Trader will come down to several individual requirements. In general, the drawbacks of a company, such as additional compliance and taxation, can be managed relatively cost effectively using service providers such as MyTax and should not detract massively from using a LTD.
However, a lot of start-ups would rather test their product / service prior to layering on additional fixed cost associate with compliance and taxation. Ultimately, an individual’s situation will dictate whether a Sole Trader or LTD is beneficial. At a high level, we suggest;
- A new product or service offering has been created and requires testing in a low-cost environment;
- There is a low investment required and liability will be minimal (legal or otherwise);
- There are no excess profits i.e. you spend what you make; and
- You do not want to utilise the benefits of pension management;
- Your product or service is in anyway litigious or you may be open to damages i.e. using LTD company will eliminate personal risk in a company;
- There are excess profits you do not require i.e paying tax at 52% vs 12.5%
- You want to maximise pension opportunities;
- You want to sell or pass on your business at some stage in the future and
- There are certain commercial needs to operate as a LTD e.g. contractual, reputational etc