Ireland’s economic recovery has led to an increasing number of new start-up businesses as entrepreneurs take advantage of more favourable market conditions. This blog is to examine potential business structures available to entrepreneurs.
There are many business structures available in Ireland, some of which do not require the creation of a separate legal entity. A company is a separate legal entity to its members unlike a sole trader or partnerships where the owners of the business and the business itself are one and the same.
Where a natural person engages in business on his or her own account, they are deemed to be a sole trader. The main advantage of being a sole trader is the informality of the start-up, unlike the incorporation of a company which is a more formalistic and prescribed procedure via the Companies Registration Office. A sole trader is fully liable for the debts of his or her business.
When two or more people carry on a business venture, in the absence of incorporation of a company, they are deemed to be a partnership and consequently subject to the provisions of the Partnership Act 1890. All partners are jointly and severally liable for the debts of the business and are not required to file annual returns publicly.
Company Limited by Shares (LTD)
The Companies Act 2014 introduced two new types of a company, a Company Limited by Shares (LTD) and the Designated Activity Company (DAC). The old LTD (Private Limited Company) was disbanded, and the new LTD and the DAC were created. The DAC is like the old LTD in its makeup.
The advantages of the LTD are:
a) Has separate legal personality (which means that the company is a corporate person. Simply put, it carries on trade and does things in its own name, not the directors or the shareholders – it’s the company)
b) Has full and unlimited capacity to carry on and undertake any business or activity or to enter any transaction. In other words, the LTD has the same capacity as a natural person.
c) Enjoys perpetual succession (Perpetual succession means that (in theory) the company could last forever, the directors and shareholders may change but the company continues.)
d) Is liable for its own debts, can sue and be sued
Designated Activity Company (DAC)
A DAC is also a new type of company that was introduced by the Companies Act 2014. The DAC is more akin to the old private limited company in that it only has the power to do acts or things that are set out in its constitution.
In all other aspects, the DAC is very similar to the LTD and is likely to be used by business owners who wish to limit the corporate capacity of their company. Investors may require a company to be incorporated as a DAC, e.g., Joint Ventures, Special Purpose Vehicle, or where minority shareholder want to ensure the company is managed as per the objects clause.
Public Limited Companies (PLC)
Similar to the LTD and DAC the liability of members of a PLC is limited. There are however significant differences in terms of incorporation, share capital, shareholdings, share transfer, corporate governance and disclosure requirements. A PLC cannot commence trade or exercise borrowing powers unless it has a minimum allotted share capital of not less than €25,000 at least 25% of which is paid up.
Persons who incorporate companies are sometimes referred to as promoters of a company. The promoters owe fiduciary (special relationship of trust and confidence) duties to the shareholders and to the company itself. In a start-up private limited company, it is not uncommon that promoters would carry out a multiplicity of roles in the running of the business, i.e., shareholder, director, employee. These roles are independent of each other, and each has their own duties and responsibilities.
The promoters may seek to enter into contracts before incorporation, and the companies act 2014 allows the company to ratify the contract and assume responsibility for it. Until the company ratifies these pre-incorporation contracts the company, the promoters will be personally liable for the contract, and the company will not be bound by them.
Piercing the Corporate Veil
There are some circumstances where the separate legal personality of the company can be set aside or disregarded, and recourse to other persons such as directors or members is possible. In certain circumstances, persons can be made liable for the debts and obligations of the company. Examples of such conditions include failure of the company to meet capital requirements, reckless and fraudulent trading, or simply failure to state the company’s name correctly.
Where a company wishes to use a name other than its registered company name it may register a business name under the Registration of Business Names Act 1963. An individual may also register a business name. It is important to note that registering a business name does not confer any strong intellectual property rights on the business. A business should consider registering a trademark if they wish to protect a particular business name.
At the start-up stage of a business, it is likely that financing the business will be one of the shareholders main concerns. There are some options open to start up’s, which are:
Ideally, companies would choose to finance its business by way of a bank or debt financing instead of issuing new shares to investors, as bank financing will not result in a dilution of the shared capacity of the company. Medium to long-term bank financing is usually arranged by way of the term loan to the company with the bank taking security over assets generally by either a fixed and/or floating charge. By their nature, start-up companies are less likely to own assets over which a bank can take security. Also Start-up business may not be in a position to start repaying the loan for a certain period.
Obtaining finance has always been a significant issue for small to medium-sized enterprises (SME’s). Within the broad umbrella of equity financing, there are many methods which companies may choose to issue equity holdings.
A) State-aided funding (Enterprise Ireland etc) This type of funding usually involves the state agency investing money in exchange for cumulative convertible redeemable preference shares.
B) Accelerator Programmes – These programmes can be state aided and non-state aided and usually include a financial investment and mentoring.
C) Business Angles – These are high net worth individuals seeking to acquire an equity shareholding in a start-up business.
D) Seed Capital/Venture Capital – These type of finance is usually more onerous on the company regarding obligations. The venture capitalist will usually require a seat at the board and will require significant protections on their investment.
E) Crowd Funding – This is a relatively new type of financing and describes a way in which individuals or organisations can raise money, usually through online platforms, to fund their corporate activities
F) Venture Debt – This can be an expansive form of lending which is usually taken by emerging companies on the cusp of venture capital investment. This attract high-interest rates but the benefit for the company is that generally no equity investment is made hence the promoters do not lose control of the company.
Stephen Walsh & Co., are an established firm of Kildare solicitors who provide expert advice to businesses and SME’s on all aspect of Corporate Law.
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