Business Formation Part 1 – Sole Traders
Contrary to what many people might think, there are still significant numbers of people setting up new business ventures. For example, in the week ending March 30th, CRO statistics show that 335 Limited Companies were formed and 254 Business Names were registered. Whilst this is much less than was the case in, say 2007, it nonetheless indicates that there are many people out there who are either making the leap to self-employment or that there are self-employed people setting up new ventures.
One of the first decisions a person starting a business will have to make is whether to register as a Sole Trader, a Partnership or whether to incorporate a Limited Company. In the first of a series of three articles we will look at some of the issues to consider if you are thinking of setting up in business. In this article the focus is on becoming a Sole Trader. Future articles will look at considerations relating to Partnerships and Limited Companies. At the end of the series, you will hopefully have some idea of which is most suitable for your particular situation. I should also stress that these articles are general in nature and it is essential that you speak with a professional advisor such as an accountant to ensure that you are choosing the correct option for your individual circumstances.
A Sole Trader is usually defined as someone who is in business in a personal capacity. They may have employees and a Business Name but ultimately, it is the individual who is in business. An example would be a shopkeeper who rents a shop and starts selling goods. He/ she could register a business name, e.g. Sound Music or they could use his own name, e.g. Pat Smith. In either case the person is the business and they are indistinguishable. One advantage of starting a business as a Sole Trader is that there are less administrative costs associated with being a Sole Trader than either a Partnership or a Limited Company. A downside of registration as a Sole Trader is that they are personally liable for any debts the business may be unable to repay.
Whilst it is optional to register a Business name, it is mandatory to register with the Revenue Commissioners as a Sole Trader. This is done using a TR1 form and is available on the Revenue’s website (www.revenue.ie) If you are unsure about completing it, your accountant can do this for you. On this form you will register for Income Tax, and possibly for VAT, Relevant Contracts Tax and as an Employer for PAYE purposes depending on your situation.
In addition to registering as a Sole Trader with the Revenue Commissioners and the Companies Registration Office, a Sole Trader will also need to consider other issues, for example whether to rent or buy any equipment required or how best to acquire their premises. If they wish to obtain bank funding they will require a Business Plan as a bank will usually require this to support any loan application. In addition to complying with your bank manager, experience tells us that producing a Business Plan is a very good exercise for a start-up business to undertake as it focuses the business on what they intend to do, instead of simply making general statements such as “I will have sales of €50,000 in my first year of trading” without specifying how this will be achieved. By creating a specific plan you will have a roadmap for the early days of the business, when there is the greatest amount of uncertainty with most entrepreneurs. As the business grows the plans will change and evolve. This is natural and is part of the challenge that entrepreneurship brings.
In Part II of this series I will look at Partnerships and some factors to consider if you are thinking of this route to Self-Employment. As always, if you have any questions, please don’t hesitate to contact the office.