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Traditionally, when a business first starts it is owned and operated by an individual. Under this circumstance the individual is known as a Sole Trader and the business for legal and tax purposes is considered to be the same as the individual owner/manager.  As such the profits of the business are considered in their entirety to be income of the proprietor and the proprietor pays income tax on these earnings. Legally, the activities, debts and liabilities of the business are considered to be those of the proprietor and as an individual the proprietor is fully liable for the debts of the business. Although many businesses start as sole trader enterprises some outgrow this business model and are operated under a different legal structure: either as a partnership, company or society. Many businesses maintain the status of sole trader without incorporating or changing legal status. There can be many reasons for doing this but mostly it is to reduce the administrative cost and burden, to maintain control and to ensure privacy.

Businesses may choose to incorporate and become limited companies. This is a common legal structure but requires additional administrative tasks, requires publication of certain aspects of the business and its directors and must comply with the requirements of the Companies Acts.

The benefits of incorporation include the limitation of liability of its owners - generally the owners become shareholders whose liability is limited to the value they have invested in the shares of the company, the perpetual life of the company, its being a separate, distinct legal entity and the means to raise equity and debt finance. In addition, a company may be deemed to have greater prestige; corporate transactions can be simplified through the use of shares and debt instruments; separation of ownership and management can also be beneficial.

The decision to incorporate a business is a complex one and is often unique to the individual business. The pros and cons will be influenced not only by tax considerations but also market influences, succession issues, where the business is in it lifecycle, intentions of the owners, growth strategy, legal imperatives and the demands of creditors, customers, lenders and other stakeholders. The following article outlines some of the key steps to be considered once the decision has been made to incorporate a business. The decision to incorporate is one that requires separate and careful professional consideration.

 

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