Limited companies?

RicardoSmith

When is it worthwhile to change from being a sole trader to a limited company?

ballooba

I'm not anexpert but this is my understanding of it.

You should change to a Limited Company when::

(a) the level at which you are exposed to the risks of the business become too great.

(b)the number of shareholders increases above one.

(c) i think banks are happier to deal with Limited companies rather than sole traders?

tomED

Yep bang on.

You will also need two people to setup a limited company (this can be your spouse friend or whatever)

but the beauty is the limited liability. as a sole trader your personal possessions come into play if you owe money.

with a limited company i think you are only liable for up to 7k - maybe an accountatn can give us more detailed information?

RicardoSmith

Why would a bank, or for that matter any company prefer doing business with a limited rather than a sole trader?

tomED

im not entirely sure - but i think its that they see a company as being more than one person - so back up if ye know what i mean!

if you were sick, will there be someone else to take over etc...

im guessing though!

ballooba

You can set up a Limited company with only one shareholder now but you need two directors?

RicardoSmith

Originally posted by tomED
im not entirely sure - but i think its that they see a company as being more than one person - so back up if ye know what i mean!

if you were sick, will there be someone else to take over etc...

im guessing though!

That doesn't sound very legal-ish?

tomED

lol, sorry but thats just an explanation i got one time....

doesn't mean its true.

Im sure from a banks point of view if you were to run up debts of millions - that they would prefer that they could get yer house and everything instead of a measly 7k....

but i can't say for sure what the reason is!!!

please someone tell us!

De Rebel

what ballooba said, and....

The rules have changed a lot in the last few years, and the differences are a lot less clear-cut today

For example, in the past the concept of Limited Liability was almost absolute; your business went bust, you screwed the VAT man and the rest of your creditors, and the following day you were back in business as if nothing had happened – this is no longer supposed to be the case, and enforcement gets better by the day. Today a director of a Limited Liability company can be pursued and there are a number of ways in which his personal assets can come into play. On the other hand, previously a Sole trader had very limited reporting requirements, whereas a Limited Liability Company, no matter how small, had to prepare a full set of audited accounts. Now Limited Liability Companies with turnover below a cut-off point need only prepare abridged accounts, very similar to the accounts which a sole trader is normally expected to submit.

In a nutshell, the points which still come into play are:
Slightly more onerous reporting requirements for Limited Liability Company
Slightly better protection from creditors for Directors of a Limited Liability Company
If you are small but intend growing BIG, may better off to incorporate as a Limited Liability Company from the outset
Probably easier to convert from a Sole Trader to a Limited Liability Company than the other way around
Some possible cash flow/tax advantages (relevant in a small minority of cases) to a Limited Liability Company (e.g. it may be possible to retain profits which will be subject only to corporation tax for use in the future, whereas a Sole trader cannot retain Pre-tax profits.
You will probably pay your accountant/tax advisor more in fees if you are a Limited Liability Company than a sole trader.
There are also pension options available to the directors of a company which are not available to a sole trader.

Specific circumstances/industry sector are also relevant.

Lastly, there is no substitute for having a good accountant/tax advisor whom you can rely on.

Victor

You should also do a comparison of the tax treatment for income tax, corporation tax, PRSI, etc.

Originally posted by tomED
but the beauty is the limited liability. as a sole trader your personal possessions come into play if you owe money. with a limited company i think you are only liable for up to 7k - maybe an accountatn can give us more detailed information?

As I understand it you are liable only for the amount of the unpaid-up share capital. If you have a company with a nominal 10,000nr. €1 shares and you hold all 1,000 paid up shares (9,000 haven't been issued) and the company goes to the wall, you as a shareholder will be liable for up to €9,000 in normal debts.

However, if you have traded wrecklessly (e.g. knowing the company was going down the tubes, but continued trading) then you as a director you may be liable for those debts also. The Revenue Commissiioners also have new powers to chase directors.

Originally posted by RicardoSmith
Why would a bank, or for that matter any company prefer doing business with a limited rather than a sole trader?

(a)It shows a certain level of sophistication.

(b) Also they will seek personal guarantees from you. They are then in a much better situation than ordinary trade creditors as the trade creditors won't be able to go after your house / car / yacht.

RainyDay

See Tommy McGibney's Guide to Starting a New Business

RicardoSmith

Originally posted by RainyDay
See Tommy McGibney's Guide to Starting a New Business

Thanks thats a great link

dynamic.ie

Hi,

A sole trader does not have limited liability and his/her personal assets may be liquidated to pay his/her creditors.

A shareholder of a company is limited to the amount unpaid on his/her share capital. They have limited liability and cannot be chased for debts owed by their company.

A director of a company is only a employee of a company... to a certain degree. He or she can be held liable for the debts of a company if he or she has been found to be trading fraudulently.

In a small Irish business, it is usual that the directors and shareholders of a company are the same persons.

Benefits of a sole tradership:

1. Full control
2. Cheaper set up costs
3. Cheaper accountants rates... usually
4. Quick and easy to set up
5. Don't need to register anything with goverment if trading under your own name. Still have to make self assesment tax calculations and pay tax based on tax rules. Only need to register business name if trading under a different name.

Upgrade (I say upgrade but others may not agree with that. Individual opinion) to a limited company if you want to take advantage of the following:

1. limited liability for you and your assets as long as you do not trade fraudulently.
2. spread the burden and responsibiliity with a business partner (you could also use a partnership to do this)
3. give your business a more professional approach and the feeling for your customers that after sales support, and the likes will be there for them. This is highly subjective to your type of business.

The main reason is to limit your liability to your share capital. You should set your company up with about 100 euros issued capital to start. If needed at a later date you can increase it for new shareholders. You can put your assets from the sole tradership in as share capital, loans to the business and by doing so become a creditor to the business and you can be entitled to your money back (if liquidation occurs) before other creditors of the business. I think that the court case is solomen vs solomen of around 1900 that proved that.

Anyway, hope that is of some good to you.

Cheeurs...


p.s. would a bank, other businesses, etc. not rather deal with sole traders because they can chase sole traders personal assets if they cannot get the money they're owed?

Victor

Originally posted by dynamic.ie
You can put your assets from the sole tradership in as share capital, loans to the business and by doing so become a creditor to the business and you can be entitled to your money back (if liquidation occurs) before other creditors of the business. I think that the court case is solomen vs solomen of around 1900 that proved that.

Solomon -v- Solomon (sp) only means that they are treated the same as other creditors, not better than them.

Originally posted by dynamic.ie
A director of a company is only a employee of a company... to a certain degree. He or she can be held liable for the debts of a company if he or she has been found to be trading fraudulently.

As I said.

Originally posted by Victor
However, if you have traded wrecklessly (e.g. knowing the company was going down the tubes, but continued trading) then you as a director you may be liable for those debts also. The Revenue Commissioners also have new powers to chase directors.

Originally posted by dynamic.ie
p.s. would a bank, other businesses, etc. not rather deal with sole traders because they can chase sole traders personal assets if they cannot get the money they're owed?

As I said.

Originally posted by Victor
(a)It shows a certain level of sophistication.
(b) Also they will seek personal guarantees from you. They are then in a much better situation than ordinary trade creditors as the trade creditors won't be able to go after your house / car / yacht.

The Corinthian

While on the face of it, one might argue that a bank should be more open to dealing with someone who is financially exposed over someone who can claim limited liability; the reality tends to be the opposite, as Victor has already pointed out. I’ll expand on his points:

(a)It shows a certain level of sophistication.

Setting up a limited company shows a level of commitment from the businessman in question. It requires CRO incorporation and name registration as well as the necessary registration for tax and, most likely, VAT. All of this paperwork is laborious, even if you have someone else doing it for you - in which case you’re paying for the service.

Additionally, there are numerous responsibilities and codes of conduct that a limited company is required to follow, or risk fines or even the imprisonment of its directors.

Conversely, a sole trader can effectively set up and operate with little or no paperwork, and equally melt away into the shadows at a later date with little difficulty. Tax returns, for many sole traders, are also no more than a vague aspiration.

Because of this relative ease of setting up and operating as a sole trader, it means that it will attract a lot of cowboys; who will be here today and gone tomorrow - not someone a bank will wish to have a lasting business relationship with.

(b) Also they will seek personal guarantees from you. They are then in a much better situation than ordinary trade creditors as the trade creditors won't be able to go after your house / car / yacht.

Limited liability does not imply a free ‘walk away from your debts’ card. As a director you will still be liable (other than from criminal prosecution for reckless trading) for what are called your secured debits.

Banks will always seek personal guarantees on business loans. Inevitably, should your business go bust, your bank will appear on the list of secured creditors that you will be liable to.

LH2011

Victor wrote: »

You should also do a comparison of the tax treatment for income tax, corporation tax, PRSI, etc.
As I understand it you are liable only for the amount of the unpaid-up share capital. If you have a company with a nominal 10,000nr. €1 shares and you hold all 1,000 paid up shares (9,000 haven't been issued) and the company goes to the wall, you as a shareholder will be liable for up to €9,000 in normal debts.

However, if you have traded wrecklessly (e.g. knowing the company was going down the tubes, but continued trading) then you as a director you may be liable for those debts also. The Revenue Commissiioners also have new powers to chase directors.(a)It shows a certain level of sophistication.

(b) Also they will seek personal guarantees from you. They are then in a much better situation than ordinary trade creditors as the trade creditors won't be able to go after your house / car / yacht.

should you have meant that the share holder was liable for €1,000 rather than €9,000 should the company go to the wall?


eg


imited liability means that the shareholders potential exposure to the debts and liabilities of the company are limited to the amount that they have agreed to contribute to the company (the issued share capital)

If the company fails, the shareholders liability is limited to the amount of share capital contributed by them

jor el

I don't think there's a need to revive a 9 year old thread. I'm sure there are more current threads on this subject.