Selecting a Legal Entity - NEW BUSINESS GUIDE to Starting your own Business for SMEs - Fitzgerald & Partners
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Selecting
ADDING VALUE TO YOUR BUSINESS
a Legal Entity
for
NEW yourBUSINESSBusiness GUIDE
to Starting your own Business for SMEs
Toolkit for Entrepreneurs 2020
No. 9, Pearse Street, Kinsale, Co Cork +353 21 4774500 +353 21 4777374 www.fitzgeraldandpartners.com info@fitzgeraldandpartners.com © Fitzgerald and Partners 2020 This guide is published for information only. It provides only an overview of the regulations in force at the date of publication. While every effort has been made to ensure the accuracy of the material in this guide Fitzgerald & Partners take no responsibility for loss occasioned to any person acting or refraining to act as a result of information contained in this publication. The information contained in this publication is to be used as a guide. For further information you should speak to a professional advisor. Neither Fitzgerald & Partners nor the Author can be held liable for any error or the consequences of action or lack of action arising from this publication.
TABLE OF
CONTENTS
4 Before Starting Up
5 Selecting a Legal Entity for your Business
8 Registering with the Authorities
10 Accounting and Bookkeeping
14 Value Added Tax
17 Payroll Taxes
20 Income Tax & Corporation Tax
22 Cash Planning and Forecasting
27 Obtaining Credit and Financing your Business
32 Insurance
36 Selecting Professional Advisors
38 Computer Accounting Systems for First Time Users
41 Growth Strategy Template
42 Useful Names, Addresses and Telephone Numbers
42 Conclusion
43 Meet the Team - Cormac Fitzgerald FCPA
It is the ambition of many people to run their own business. In recent
years this dream has become a reality for some made redundant,
whilst others may decide to start up in business to be more
independent and to obtain the full financial reward for their efforts.
Whatever the reason for considering setting up in business, a number
of dangers exist.
A major concern must be the risk of business failure despite
considerable effort and finance having been put into the venture. Time
spent in making the decision and thinking through your plans will
minimise the risk of failure.
Think carefully about ceasing to be someone else’s employee.
Certainty of income, both in terms of quantity and regularity,
disappears, whilst fixed outgoings, such as mortgage repayments,
remain. Similarly, other benefits of employment may be lost, such
as life assurance cover, a company pension, medical insurance, a
Before company car, regular hours and holidays.
Starting Up Consider the views of your family and friends. Their support is
essential. It is important they understand that the administrative and
financial requirements of running a business can be time consuming
and stressful.
Success in business depends on many factors; most important is the
need to critically review all aspects of the business proposition before
progressing too far.
This guide highlights many of the practical points that require
consideration before trading begins. It cannot cater for every
possibility and decisions should be supported by appropriate
professional advice.
We wish you the best of luck on your journey. Please select a good
team of advisors to help you. Our team at Fitzgerald & Partners would
be delighted to help you in any way possible from a business advisory
aspect through to compliance. Please follow us on social media for
regular updates.
Cormac Fitzgerald FCPA
4
Selecting
a Legal Entity
for your Business
5
Selecting a Legal Entity
for your business
One of the first major decisions you will have to make as you start
your new business is the form of legal entity it will take. To a large
degree this decision may be dictated by the way you have organised
your operations and whether you intend to work on your own or in
conjunction with others.
The form of entity you choose can have a significant impact on the
way you are protected under the law and the way you are affected by
taxation rules and regulations. There are three basic forms of business
organisations. Each has its own benefits and drawbacks and is treated
differently for legal and tax purposes.
Sole Proprietorship Partnership Limited Company
A sole proprietorship is typically In a partnership, two or more A limited company is a separate
a business owned and operated individuals join together to run legal entity that exists under
by one individual. A sole the business enterprise. Each the authority granted by the
proprietorship is not considered of the individual partners has Companies Acts. A limited
to be a separate legal entity under ownership of company assets company has substantially all of
the law, but rather is an extension and responsibility for liabilities, the legal rights of an individual and
of the individual who owns it. as well as authority in running is responsible for its own debts. It
The owner has possession of the the business. The authority of the must also file tax returns and pay
business assets and is directly partners, and the way in which taxes on income it derives from its
responsible for the debts and other profits or losses are to be shared, operations.
liabilities incurred by the business. can be modified by the partnership
The profit or loss of a sole agreement. The responsibility for Typically, the owners or
proprietorship is combined with liabilities can also be modified by shareholders of a limited company
the other income of an individual agreement among the partners, are protected from the liabilities
for income tax purposes. but partnership creditors typically of the business. However, when
have recourse to the personal a limited company is small,
A sole proprietorship is perhaps assets of each of the partners for creditors often require personal
the easiest form of business to settlement of partnership debts. guarantees of the principal owners
own and operate because it does before extending credit. The legal
not require any specific legal The rights, responsibilities protection afforded the owners of
organisation, except, of course, and obligations of partners are a limited company can be useful. A
the normal requirements such typically detailed in a partnership limited company must file accounts
as licences or permits. A sole agreement. It is a good idea to at the Companies Registration
proprietorship typically does have such an agreement for any Office.
not have any rules or operating partnership. A partnership is a
regulations under which it must legal entity recognised under the Incorporating a business allows
function. The business decisions law and, as such, it has rights and a number of other advantages
are solely the result of the owner’s responsibilities in and of itself. A such as the ease of bringing in
abilities. partnership can sign contracts, additional capital through the sale
obtain trade credit and borrow of share capital, or allowing an
money. When a partnership is individual to sell or transfer their
small, most creditors require a interest in the business. It also
personal guarantee of the general provides for business continuity
partners for credit. when the original owners choose
to retire or sell their shares.
Partnerships are obliged to
prepare accounts.
6
Business
Structure Company
Sole Trader/
Partnership
The Pros
and Cons
A company must be formally The business name needs to
incorporated with a written be registered at the Companies
constitution. There is an initial Registration Office, but otherwise
setup cost, and the business there are minimal formation costs.
name needs to be registered at However, a written partnership
Companies Registration Office. agreement is advised.
Companies are governed by the
companies Acts. A company must:
◆ Keep accounting records
◆ Produce audited accounts, Sole traders and partnerships
unless eligible for Audit are not required by law to have
Exemption. annual accounts nor to file
◆ File accounts and an Annual accounts for inspection. However,
Return with the Companies annual accounts are necessary
Registration Office. This for the Revenue self assessment
information is available tax returns.
to the public.
◆ Keep Statutory Registers
and Minute Books.
Companies may have greater Sole traders and partners are
borrowing potential. They can unrestricted in the amount and
use current assets as security by purpose of borrowings but cannot
creating a floating charge. create floating charges.
Shares in a company are
generally transferable, therefore
ownership may change but the
business continues.
Incorporation does not guarantee
reliability or respectability but
gives the impression of a soundly The unincorporated business
based organisation. Personally, does not carry the same prestige.
there may be prestige attached to
directorship.
A company pension plan has
greater flexibility.
Losses generated by a sole
First year losses in a company trader or a partner can be set
can only be carried forward to set against other income of the year
against future profits. or carried back to prior years.
(subject to restrictions)
All funds withdrawn must be
by salary or dividend and an Taxation is calculated on profits
immediate tax charge arises and PAYE/PRSI is not a factor.
in the month.
7
Registering
with the
Authorities
8
Registering with
the Authorities
A significant task for the new business owner is ensuring that the
business is properly complying with the extensive tax and information
filing requirements imposed by the various authorities. Problems
and penalties could arise if the new business is not registered with
the appropriate tax authorities in a timely fashion. While this chapter
is not intended to be an all- inclusive list of filing requirements, it
summarises some of the more prominent requirements common to
most businesses.
Revenue
and Companies
Registration
You should advise the tax office
Y Further information
f on Revenue’s Form RBN1 needs to be completed
when you start a business as a online service can be ffound at by a sole trader (Form RBN1A
self-employed person/sole trader.r www.revenue.ie. f r a partnership) to register any
fo
You must do this online using the
Y business trading name and this
Revenue Online Service – ROS, There are a limited number is filed at the Companies Registration
through the online eRegistration of customers where paper Office with a fef e of €40 (or filed
Service if you are: registration applications are still online fof r €20).
accepted - you will find details of
t An individual who is currently those customers at eRegistration If a company is being set up, you
registered for
f PAYE
A Anytime; Service . Paper applications first need to register with the CRO.
t An individual who is currently received where the applicant is A fform A1 needs to be completed
registered for
f Revenue’s Online required to submit the application and sent with the Constitution of
Service – ROS on-line will not be processed the company and a ffee of €100
and the paper application will be to the Companies Registration
t Represented by an Agent. returned for
f completion on-line. Office (€50 if filed online). If the
trading name is diffeff rent from the
ROS is Revenue’s internet facility
f The TR1/TR2 form
f can be used company name then fform RBN1B
which provides you with a quick to register ffor any/all of the needs to be completed and
and secure facility
f to register f lowing:
fol sent to the Companies Registration
f tax, pay tax liabilities, file tax
for Office with a ffee of €40 (or €20
returns, access your tax details t Income Ta
Tx if filed on-line). Once you have
and claim repayments. The t Employer’s PAYE/PRSI
A received your CRO number you
ffacilities are available 24 hours a can then register on- line with
day,
y 7 days a week, and 365 days a t Value Added Ta
V Tx ROS or a paper fform TR2 needs
year.r Y
You will also benefit from an to be completed ffor the Revenue
extension to existing deadlines forf t Relevant Contracts Ta
Tx Commissioners.
paying tax and filing returns where t Corporation Ta
Tx
you both pay and file using ROS.
9
Accounting
and Bookkeeping
10Accounting
and Bookkeeping
Most operators of a new and growing business have a flair for the
Questions you should environment in which the business operates. They may be a great
ask in developing an salesperson, an outstanding mechanic, carpenter, solicitor, or inventor.
accounting and financial Unfortunately, most people don’t like to keep the books. As an owner
reporting system are: of a business you must remember that your company’s books and
financial statements represent a score sheet which tells how you are
progressing, as well as an early warning system which lets you know
when and why the business may be going amiss. Financial statements
Who will be the and the underlying records will provide the basis for many decisions
users of the financial made by outsiders such as banks, landlords, potential investors, and
information? trade creditors as well as taxing authorities and other governing bodies.
The necessity for good, well-organised financial records cannot be over
emphasised. One of the greatest mistakes made by owners of small
What questions do businesses is not keeping good financial records and making improper
I need answered to or poor business decisions based on inadequate information.
manage the business?
Quality financial information does not necessarily translate into
complicated bookkeeping or accounting systems. Far too often owners
What questions should of businesses become overwhelmed by their accounting system to
be answered for the the point where it is of no use to them. An accounting or book-keeping
Revenue Commissioners system is like any tool used in your business; it needs to be sophisticated
and other authorities? enough to provide the information you need to run your business and
simple enough for you to run it (or supervise the book-keeper).
As your business grows, you should work closely with your accountant
to ensure that your accounting system is providing you with appropriate
information.
Chart of Accounts
The basic road map into any 1. Will your business have stock Each one of these questions
accounting system is the chart to account for? If so, will it be can have several answers and
of accounts. It is this chart that purchased in finished form or will probably generate more
helps establish the information will there be production costs? questions. Each answer will have
that will be captured by your 2. Are fixed assets a significant an impact on how the chart of
accounting system, and what portion of your business? accounts is structured. It may
information will subsequently be 3. Will you sell only one product seem that developing a chart of
readily retrievable by the system. or service or will there be accounts is not particularly high
This tool, like the rest of the several types of business? on your list of things to do as you
accounting systems, needs to be 4. Will you have accounts start a new business; the amount
dynamic and should grow as the receivable from customers, of time and money which a well
size and needs of your business which you will have to track? organised accounting system
changes. 5. Are you going to sell in only may save you can be significant
one location or will you do as the need to generate
To help establish a good working business in several places? information for various purposes
chart of accounts you need 6. Are the products you sell increases.
to answer some questions, in subject to value added tax?
conjunction with your accountant, 7. Do you need to track costs by An example of a basic chart of
as to how your business will department? accounts follows this section.
operate and what is important to 8. What type of government
you. Some of these considerations controls or regulatory
might be: reporting are you subject to?
11Accounting
and Bookkeeping
Cash or Accrual Accounting Records A Word about
Accounting and Record-keeping Computers
One of the decisions to be Another question that the owner The computer is probably the
made as you start a business is of a business must answer is single, most valuable, invention
whether to keep your records “Who will keep the books of for bookkeeping and accounting
on a cash or accrual basis of the business?” Will you do it since the advent of double entry
accounting. The cash basis of yourself, will the receptionist bookkeeping.
accounting has the advantage of or a secretary double as a part-
simplicity and almost everyone time bookkeeper, will you have There are a number of very
understands it. Under the cash a bookkeeper that comes in good and easy to use accounting
basis of accounting you record periodically, or will the volume of software systems which are
sales when you receive the money activity be such that a full-time commercially available, but
and account for expenses when bookkeeper will be required? none of them will solve the
you pay the bills. problems of inaccurate or poor
Very often the owners of quality financial records. All
Unfortunately, as we all know, a business decide to keep they will do is generate bad
the business world is not always the books themselves and information faster. This is one of
so easy. Sales are made to underestimate the commitment the reasons that the computer
customers and you sometimes they have made to other phases has also probably caused more
must extend credit. Your business of the operation and the time headaches for the owners of
will incur liabilities which are due required to maintain a good set modern businesses than any
even though you may not have of financial records and books other single cause. If you want to
received the invoice or have the of account. As a consequence, use a computer-based accounting
cash available to pay them. the record keeping is often low package, either in your own
priority and must be caught up business, with a service bureau,
Most users of financial later. This approach, though or through your accountant, it is
statements such as bankers and rarely planned, can require a imperative that you generate
investors are used to accrual- substantial expenditure of time accurate information to be
basis statements and expect and money. While it is important entered into the system.
to see them. Once you become for the owners of a business to
familiar with them, they provide maintain control and stay involved The real value of the computer
a much better measuring device in the financial operations of the becomes apparent once it
for your business operations than enterprise, this can be achieved is running smoothly in your
cash-basis statements. by maintaining close control over business. Your accountant can
the cheque-signing function and then function in the capacity for
Whether you use the cash or scrutinising certain records. Your which he was trained, not as a
accrual basis, it is possible to company’s accountant can help “number cruncher”, but as your
keep books for income tax develop a good programme of business advisor, consultant
purposes on a different basis record-keeping duties for you, and strategist. Both of you can
than for financial statements. It your employees and any outside focus not on producing reports
may be more advantageous (less book-keepers or accountants you for various regulatory agencies
tax) for you to do so. may engage. but on analysing your business to
make it more profitable.
12Accounting
and Bookkeeping
Internal Control These are fundamentals in a well-
run business. As the company 3000
Capital and reserves
Capital account -
grows you will need to consider balance brought forward
What is internal control? It is the 3100 Capital introduced
concepts such as segregation of
system of checks and balances 3200 Profit and loss account
authority or controlled access
within a business enterprise that 3300 Drawings
storerooms.
helps to ensure that the company’s
assets are properly safeguarded Other income
No matter what the size of your 4200 Royalties received
and that the financial information
enterprise, you should consider 4210 Commissions received
produced by the company is
controlling your business and 4220 Insurance claims
accurate and reliable. When
safeguarding hard earned assets 4230 Rental income
you are operating as a “one man 4240 Bank interest received
as a priority from the outset.
shop” or at least handling all of the
company’s financial transactions, Cost of sales
maintaining good internal
accounting control is relatively
Illustrative Chart 5000
5900
Purchases
Opening stock and work in progress
straightforward. of Accounts 5950 Closing stock and work in progress
Fixed assets - tangible Direct costs
However, when your company
6000 Direct labour
grows to the size where you must 0010 Freehold property cost
6100 Goods outward costs
delegate some of the functions, it 0020 Freehold property depreciation
6200 Goods inward costs
becomes more difficult to ensure 0110 Leasehold property cost
6300 Packaging
0120 Leasehold property depreciation
that all the transactions are being 6400 Duty paid
2010 Plant and machinery cost
accounted for properly. 6500 Transport insurance
2020 Plant and machinery depreciation
6600 Sales commission payable
3010 Fixtures/fittings cost
No matter the size of your 3020 Fixtures/fittings depreciation
6700 Royalties payable
business, you should always 4010 Motor vehicles cost
be able to answer “YES” to the Overheads
4020 Motor vehicles depreciation
7000 Motor expenses
following questions:
Fixed assets - intangible 7100 Telephone
7200 Wages
◆ When my company provides 0700 Investments
7250 Wife’s wages
0900 Goodwill
goods or services to our 7300 Rent
customers am I sure that the Current assets 7400 Rates
sale is recorded and the debt is 1000 Freehold property cost 7500 Heat and light
*
recorded in accounts receivable 1100 Freehold property depreciation *
7600 Postage, stationery and advertising
or the cash is collected? 1103 Leasehold property cost *
7700 Repairs and renewals
1200 Leasehold property depreciation 7800 Insurance
*
◆ When cash is expended by my 1230 Plant and machinery cost *
7900 Bank charges and interest
8000 Hire purchase interest
company am I sure we received
Current liabilities 8050 Mortgage interest
goods or services?
2100 Purchase ledger control 8100 Accountancy fees
*
2109 Creditors and accruals 8200 Legal charges
The method used to ensure *
2200 VAT control account 8300 Use of home as office
*
that these two questions can be 8400 Protective clothing
2300 PAYE/PRSI creditor *
answered affirmatively will be 8500 Cleaning
widely varied. They are essential * denotes control accounts 8600 Sundry expenses
stepping-stones to maintaining Sales 8700 Subsistence
good control in your business. The 8800 Profit on asset sales
4000 Sales/work done
8900 Depreciation
solution in your particular instance 4009 Discounts allowed
9000 Bad debt write off
may be as simple as numbering 4100 Export sales
the sales tickets and being sure
ALL TICKETS ARE ACCOUNTED Long term liabilities
FOR or reviewing all invoices and 2600 Bank loans
2700 Hire purchase creditors
timecards before signing company
2800 Lease purchase creditors
cheques.
2900 Other loans
13Value
Added Tax
14Value Added Tax
VAT is a tax on consumer expenditure and is ultimately paid by the final
customer. Most business transactions involve the supply of goods or
services and VAT is payable if they are made:
◆ In the Republic of Ireland; By a taxable person;
◆ In the course or furtherance of business
and are not specifically exempted or zero rated;
◆ To unregistered EU customers.
◆ VAT is collected by the Collector General
and is normally payable bi-monthly.
Registration Input VAT Special Events
VAT registration is necessary Input VAT is the VAT that you VAT was originally described as
if the annual business turnover are charged on your business a simple tax but has gradually
(excluding VAT) is likely to exceed purchases and expenses (the become more and more
the following annual limits other persons output VAT) and complicated over the last twenty
(w.e.f. 1 May 2008): is normally recoverable in full years with changes to the
In respect In respect by a trader who only makes operation of VAT every year.
of supplying of supplying standard rated or zero-rated
goods services It is not always possible to
supplies. Businesses that make
€75,000 €37,500 some exempt supplies (known calculate each period’s VAT
as partially exempt businesses) liability by merely deducting
Registration may also be input VAT incurred from the sales
have different recovery rules.
necessary if you are in receipt income and professional advice
The total input VAT suffered in
of taxable services from abroad needs to be taken in the following
the period is deducted from the
or if you are a foreign trader situations:
output VAT charged or collected
doing business in the State.
and the difference is either the
There are certain circumstances ◆ Importing and Exporting -
amount of VAT due or the amount
where it is not compulsory, either within or outside the
repayable.
but still advisable to register. European Union;
The majority of input VAT is
Tax Rates recoverable but there are special
rules for certain transactions.
◆ Retail Schemes, i.e. where
both zero rated and standard
The standard rate is 23% but there rated supplies are made
are reduced rates of 13.5% charged To reclaim VAT you have been which cannot be separately
for tourism related activities, charged as input VAT, you must identified at the point of sale;
4.8% specifically for agriculture hold valid evidence that you have
9% for Newspapers and Sporting received a taxable supply, which ◆ Land and Property;
facilities. normally means a valid VAT
invoice from a registered trader ◆ Cash Accounting;
The 13.5% rate applies to certain
fuels, building and building services, showing his VAT number and the
amount of VAT charged. ◆ Self-supplies;
certain newspapers etc. Some
goods and services are zero rated –
◆ Second-hand schemes for
no VAT and some are exempt from
VAT. Suppliers of goods and services
Penalties movable goods, works of art,
collector’s items and antiques,
exempt from VAT are not entitled Interest on overdue tax is charged sales of trade in vehicles by
to register for VAT unless they also on a daily basis and this also motor dealers and sales of
make taxable supplies applies to overclaims of VAT. agricultural machinery by
Any VAT charged by the business is dealers.
known as output VAT and the total
charged or collected in the VAT
period is payable to the Collector-
General. 15Accounting
and Bookkeeping
VAT Checklist Money Laundering
Regulations
Registration Input Tax There are many aspects to the
The Criminal Justice (Money
a. Should the business a. Do any restrictions on input Laundering and Terrorist
be registered? tax exist? Financing) Act 2010 but in
particular attention is drawn
b. Is basis of registration » If “Yes”, does an agreed to those relating to High Value
correct? method exist? Dealers (HVDs).
c. Are details on registration » Does this method HVDs are those traders who may
certificate correct? maximise input tax? receive €15,000 (or equivalent in
any currency) for goods, whether
d. Do procedures exist for b. Are invoice additions it be in a single transaction or
notifying the Revenue and calculations checked? a series of linked transactions.
Commissioners of The Regulations principally apply
relevant changes? c. Is input tax claimed if cash or cash equivalent are
at the earliest tax point? offered in settlement.
e. Review position
at regular intervals. d. Are all claims properly
If you believe you may be a
supported?
HVD you should discuss this
with your advisors. There
» Ensure all supporting
is a requirement for the
invoices kept.
designated persons covered in
Preparation this legislation to undertake
of returns specific effective customer due
Output Tax diligence measures at the outset
a. Has return been received? of a business relationship and
If not, then obtain certain other measures during
a. Are all income heads
duplicate from VAT Office. the course of the business
reflected for VAT accounting?
relationship.
b. Review sources
b. Are all potential sources of
of information.
notional supplies considered? Further if you believe you may
be affected by the Regulations
c. Prepare draft return.
c. Are all potential sources as they related to regulated
d. Check for accuracy and of income (asset sales, etc.) businesses you should discuss
completeness. covered by the VAT this with your advisors as the
accounting system? penalties for not complying are
e. Make payment (if outputs serious.
exceed inputs) d. Is VAT captured
at the correct tax point?
e. Is VAT correctly applied
where appropriate?
16Payroll
Taxes
17Payroll Taxes
Do you have
employees? Irrespective of the form of business in which you operate,
if you are going to have employees then you will have to contend
with payroll taxes. The brief summary that follows will give you some
Whether an individual is
an employee or not in a particular guidance in the rules and regulations in connection with PAYE/PRSI.
situation is a question of fact
depending on the terms on which
he/she works. The question
of whether an individual is
employed or self-employed is
very important for the business Helpful publications
“employing” him or her, as that
business has to comply with the The Revenue Commissioners have a very useful section on their
reporting requirements. website www.revenue.ie on an Employers Guide to PAYE/PRSI. Not
only do you collect and remit PAYE to the Revenue Commissioners,
In certain areas the Revenue you also operate the PRSI scheme. You should run the PAYE scheme
Commissioners has placed in accordance with the legislation and should you fail to comply then
emphasis on reclassifying the Revenue Commissioners will look to you for the amounts you
individuals claiming to be failed to deduct. This can be costly if you are unable to recover the
self employed and has issued amounts from the employee.
the leaflet “Employed or self
employed – a guide for tax and
social insurance”. This booklet
sets out the questions that should
The Operation
be answered to determine the of a PAYE Scheme
problem. If you have treated
someone as self employed and Upon registration the Revenue Commissioners will send to you
subsequently after a routine visit guidelines on operating PAYE/PRSI.
from the Revenue Commissioners
it is clear that they were Included will be a number of forms with which to operate the PAYE/PRSI
employees, then the tax etc which and benefits in kind system. You should familiarise yourself with and
should have been paid will be have supplies of these forms, which are as follows:
assessed on you. Therefore it is P46 Notification of new employee to the Regional Revenue office
important to ensure when using P45 Details of employee leaving
the services of self employed P60 End of year return and employers certificate
people, that they are in fact self- P35 Employer’s annual statement
employed. P35L/P35L/T Employer’s supplementary returns
P50 Employee’s application for refund of tax during
If doubt exists as to the status of unemployment
an individual, the situation can P30 Bank Giro payslip remittance form for PAYE/PRSI
be clarified with the Revenue contributions
Commissioners.
In order to calculate the amount of tax and PRSI due by an employee, the
PAYE Modernisation For Revenue Commissioners will supply you with certificates of tax credits
Employers - Are you ready ? and cut- off point.
system from January 1st 2019.
A Universal Social Charge has now been introduced to replace the
This means that an electronic return must be submitted to
Revenue as part of each and every pay run. Income Levy. Another set of tables can be referenced to calculate same.
The electronic return, which will be prepared automatically
by our payroll software, must be submitted “on or before” The Employer’s and Employee’s PRSI insurance is calculated by
the payroll date. This will impose a greater obligation on
employers to ensure that the information submitted in every reference to the gross pay with a third set of tables.
payroll run is as correct and complete as possible.
Corrections can be facilitated under the new system, but
they may have adverse consequences.
The tax and PRSI should be paid to the Collector-General between 1st
Contact our payroll outsourcing team to let us quote for and 14th of the next calendar month following the month in which the
looking after your payroll functions as we successfully do
for lots of SMEs in West Cork. deductions were made. Payment can be by direct debit.
021 4774500
Pearse Street, Kinsale
Benefits in kind are also taxed through the PAYE system.
Follow us on
AUDIT t TAXt ADVISORY t BUSINESS CENTRE
18Employer Some key considerations when employing staff,
Responsibilities especially for the first time, are set out below.
Salary and payroll
If employing full-time or part-time staff, you’ll need to agree a salary
(at least the national Minimum Wage) and set up a payroll to help you
manage tax and national insurance contributions.
Work eligibility
You’ll need to check if someone has the legal right to work in Ireland.
References
Obtain references from previous employers and carry out employment
checks as necessary.
This is especially important where your employees may be people
working with children and vulnerable adults, in which case the Garda
Central Vetting Unit will deal with requests to provide information on
certain prospective employees.
Employer insurance
You need employers’ liability insurance as soon as you become an
employer.
Job descriptions
Send details of the job (including terms and conditions) in writing to your
employee (if you’re employing someone for more than one month).
Health & safety
Understand your obligations around accidents at work, health and safety
laws and workplace conditions.
Pensions
Employers with at least one member of staff now have pension
responsibilities through pensions auto-enrolment.
19Income Tax and
Corporation Tax
20Income Tax
and Corporation Tax
Eventually you will have to deal with income or corporation taxes.
The taxation legislation is extensive and can be confusing for an
individual starting a business. This chapter does not cover all the tax
ramifications of a new business, nor does it detail all the expenses
you can claim for, nor does it give details of allowances available on
the purchase of some capital items. A qualified Accountant should be
consulted when you are dealing with the taxation affairs of the business.
The payment of taxation has a direct impact on your cash flow.
Which accounting Companies
year should I choose? Companies are charged corporation tax at the rate applicable during the
financial year. Where a company’s accounts period spans two financial
If you expect profits to rise
years the profits for the period are apportioned between the years.
steadily year by year, in the case
of sole traders/partnerships, an
The Corporation Tax rate is 12.5% for trading income and 25% for passive
accounting date early in the tax
income such as rents or investment income.
year, for instance 31 January, might
be best in the short term, because
this will defer the payment of tax
on your profit. Sole Traders/Partnerships
On the other hand if you expect to Sole traders and partnerships are charged income tax at the rate
make losses in your early years, an applicable during the financial year ended on 31st December.
accounting date late in the tax year,
for instance 31 December, will The rates are currently as follows:
ensure that you get tax relief for
those losses as quickly as possible. 2014 Rate 2015 Rate 2016 Rate 2017 Rate 2018 Rate
It will also be necessary to bear
in mind the seasonality of your Single
business. As part of the profit for person €32,800 20% €33,800 20% €33,800 20% €33,800 20% €34,550 20%
your first period of trading could be
taxed twice, it would be unfortunate
if a poor choice of accounting date Then balance 41% balance 40% balance 40% balance 40% balance 40%
were to accelerate the tax on the
profit of your first busy period.
In these circumstances it might Under self-assessment your income tax return, which encompasses
be preferable to run your first your trading results, needs to be filed by 31 October following the tax
accounts to a date just short of assessment year.
your peak period.
For start-ups and on admission of partners the rules are complex
As ever, it is important not and you should refer to an accountant for specific advice.
to overlook commercial
considerations. Your bankers might
want to see as healthy a profit as
you can manage and this desire
Penalties
could conflict with tax planning.
There are penalties for late submission of returns
A solution would be to choose a
and for late payment of tax.
tax efficient tax accounting date,
and keep the bank happy with
quarterly management accounts.
21Cash Planning
and Forecasting
22Cash Planning
and Forecasting
Starting Cash Credit
the Analysis Collections Control
One of the most significant Once you have determined a Credit control is a system used
factors to be considered in your reasonable level of sales and in business to make certain that
cash flow forecast is the volume you are comfortable with the it gives credit only to customers
of sales that will be generated in forecast you have made, you who are able to pay. Each
the next several months and for must address questions such business should have a credit
the rest of the period for which as: what percentage of my sales policy outlining what is allowable.
you intend to forecast. Your sales are received in cash, and what
forecast must be as fine tuned portion are credit sales for which As part of the policy a credit
as possible. It may be unrealistic I will have to carry amounts limit could be enforced on
to assume that there is a million in debtors? For those that are customers who have had a history
pound market for your product in debtors based, how soon is the of payment difficulty. Accept
your area and you will be able to cash collected? Do I have to deposits up front for large orders.
capture a specified percentage wait for customers to pay me Deposits can help finance the
of it. A sales forecast needs or do third parties such as Visa cost of providing goods/services
to be based on specific facts. or MasterCard or a debt factor without negatively impacting your
These might include your sales take the customers account and own cash position too much.
history or the history of similar convert it to cash for me with an
businesses you have owned or appropriate discount? It is extremely important that you
operated or the competition. remind customers to pay their
In your area, what has been the If you are relying on customer invoices. Don’t assume that
experience of similar operations? payments for collection of debtor because it has fallen due that it
balances you must determine will be paid. Chase your revenue.
Some of the questions that what portion of the debts will
should be addressed would be collected in thirty days, sixty Other sources of cash may be
include what other factors days, ninety days and thereafter, available in addition to sales. Do
could I control such as adding and what portion, if any, may you expect to bring in a partner
new product lines, deleting never be collected. To assume or other investors, or can you
unprofitable operations, that 100% of your sales will borrow money from a bank?
adding a new salesperson, or ultimately be converted to cash When will you receive the cash
terminating one that is not is probably unrealistic especially and how much will you get?
producing to quota? In preparing considering the current economic Part of your cash flow analysis
a forecast, you must also take environment and the tight cash may be to determine how much
into consideration items such as situations that may face some of investment money or borrowings
the seasonality of your business, your customers. will be required to operate your
the relative state of the economy business.
and the period over which you will
forecast. Once you are comfortable with
the cash receipt side of your
Obviously your ability to forecast business, and the timing of
sales for the next month is better the collections of funds from
than it is for three to five years your sales and other sources,
from now. The amount of detail it is necessary to consider the
that must be included in the expenses and other cash needs of
cash forecast is really a matter your business operation.
of preference. It can be based on
per unit sales extended out by
the sales price of each type of
unit or an average sales volume
per day, week or month of your
type of business in its current
environment.
24Cash Planning
and Forecasting
Disbursements
Certainly if your business entails Once you have determined the In addition to determining the
sales of stock, you will have cost of operating your production amount and volume of expenses
to purchase the merchandise or service facilities, you need to and cash outlays you will have to
from others or purchase the consider what other expenses make, it is critical to determine
component parts and pay you must pay to keep the doors the timing of such payments.
employees to assemble it. This of your business open. You As we have discussed in other
may require a significant outlay typically will have to pay rent for chapters, there may be a variety
of cash before the first pound of your office or manufacturing of financing alternatives that are
sales is generated and received. facility. You must consider how available to you.
much the monthly payment is
You should consider how often and when it has to be paid. Ask Most of the start-up cost which
and in what amount your yourself if there will be other you incur can be delayed or
employees must be paid and cash requirements such as a deferred until you can generate
when their payroll taxes must be deposit on first and last month’s the cash from your operation
paid over. rent. If you are opening a new to help pay them. This needs to
business, you must consider what be carefully analysed and built
Additionally, you need to know the your cash requirements are to in to your cash flow analysis.
credit trade terms your creditors make your facility ready for your However, a good rule of thumb is
are willing to advance to you. Do specific needs and purposes. Will to assume that you are going to
you have to pay for stock items on you have to buy or rent furniture? have to pay your expenses sooner
a C.O.D. basis or can you pay for Will you need to make tenant than you think and that you will
them thirty or forty-five days after improvements or pay deposits for collect your cash slower than you
receipt? What expenses must utilities and other services? anticipate. If you work with this
be paid to allow you to convert attitude, any surprises should be
purchased merchandise to You also need to consider many favourable ones.
saleable stock? If your production of the overhead items and costs
requires utilities to run machines to open a new business that will Cash flow projections can be
or supplies that are required, hopefully be one-time expenses. very slow, time consuming and
such as consumable chemicals or This may be a solicitor’s fee for tedious to undertake. It is often
packing materials that must be drafting partnership agreements very tempting to hire someone
purchased prior to the sale of the or incorporating your business, else to prepare the projections
stock, you should consider the the cost to obtain business for you. There are a variety of
timing of these payments. licences, approval from the individuals who can help you
taxing authorities, setting up an do this, but the critical factor
In addition to the cost of accounting system, stationery is that they only help. You as
manufacturing, you should costs, cost of signs or logos. the owner and operator of the
consider whether your productive business are the only one truly
capacity would allow you to It may seem like the list of costs qualified to develop your cash
generate enough stock to support and expenses to be incurred is flow projections. You know what
the level of sales that you are endless. It may even discourage it takes to open and operate your
predicting. If the volume of sales you in moving forward with your business. Certainly a trained
you forecast is above your ability business endeavour. However, professional can offer guidance
to produce today, what changes in it is imperative to make the and ask pointed questions to be
your operating environment must list as detailed as possible to sure you are considering all of the
be made to meet the production ensure that you have sufficient necessary and sometimes hidden
levels. Will you need additional funds to make your operation costs of operating a business.
employees, if so, how much will ready for business prior to However, the more effort you put
they cost? Do you have to acquire running out of cash. The more into developing the cash flow
additional machinery for your detailed the list and the more projections the more accurate
shop operations? What is the sufficient information you can they will tend to be. This exercise
cost of the machinery and when provide, the less chance there is may also help you to pinpoint
will you have to pay for it? Do you of unpleasant surprises as you areas of potential cash savings
have enough space to cope with move down the stream to opening that you have not otherwise
the additional activity? your business. considered.
25The following tax matters require
tax matters consideration as part of the preparation
of your cash flow forecast:
VAT and Other Taxes
If you are VAT registered (compulsory for businesses with sales in
excess of the statutory limit), your sales receipts will include “Output”
VAT and some of your costs will include “Input” VAT.
The net receipt of VAT has to be paid over to the Collector-General
bi-monthly. If, however, your sales are zero rated, you will be able to
claim back the VAT on your purchases.
The basic calculation is not as difficult as is often made out. Typically,
adding up your sales receipts for a period, multiplying the figure
by 13.5 and dividing by 113.5 gives you your output VAT (assuming all
sales at 13.5%). Do the same for your purchase invoices to calculate
input VAT. Deduct input from output and put this figure into your cash
forecast in the first month of the next period.
PAYE
If you employ people you will have to deduct tax/PRSI from their
pay and pay it over to the Collector-General in the following month.
For a forecast it is sufficient to put the gross figure in the cash flow
forecast as it automatically includes PAYE. Don’t forget to include
your employers PRSI payment in this calculation.
Personal Tax
If you are the proprietor of a business that is not a limited company,
your wages are part of the profit of the company and referred to as
“drawings”. The tax that you pay will be based on the profit of the
company not the amount that you take out. It is advisable to pay a
sum into a deposit account each week to provide for this tax that will
be due after your year-end - and it could be a lot of money. Ask your
accountant about this!
Many businesses go bust because they fail
to provide for the taxes that are payable.
Make sure that it does not happen to you!
26Obtaining Credit
and Financing
for Your Business
27Obtaining Credit and
Financing for Your Business
If not independently wealthy and perhaps even if you are, eventually you
will probably need to obtain some outside capital for your business. In some
instances, you may need to obtain capital for the initial expenses prior to
opening your business or for instance, the funds you require may be for
expansion or working capital during the off season.
Generally business financing can take two forms, debt or equity. Debt, of
course, means borrowing money. The loans may come from family, friends,
banks, other financial institutions or professional investors. Equity relates
to selling an ownership interest in your business. Such a sale can take many
forms such as the admitting of a partner or, if you are in a company, issuing of
additional shares to investors. It is typically a prudent idea to consult with your
accountant, as there are many significant legal ramifications to such a step.
1. How much cash do I 3. What experience do
need? you have in running your
How Do I Get To answer this question you will business?
the Money? have to do some serious cash One of the primary reasons
flow planning, which will require for business failure is lack of
estimates of future sales, the related experience of management. You will
Irrespective of the type costs, and how quickly you must pay need to convince your investors that
of financing you need and your suppliers. You will also have you have the knowledge, experience
to build into your planning some and ability to manage your business
are able to obtain for your
assumptions about when you will and their money at the level at
business, the process of generate enough cash to pay the
obtaining it is somewhat which you expect to operate.
money back. However, if you raise
similar. There are several cash through equity you probably
questions that must be don’t need to pay it back but your 4. What is the climate
answered during the investors will want to know how for your type of business
the value of the business will grow
course of raising money for
and how they will benefit through
and your geographic
your business. The ability location?
dividends or selling their shares.
to answer these questions
Few investors will want to put
is critical to your success in
obtaining financing as well 2. What will you do with money into your business if you
haven’t done sufficient “homework”
as the overall success of the money? to determine that you have a
the business. Remember, One of the most important questions reasonable chance of success. If
in raising capital you have you will have to answer for a your business is based on existing
to sell the ability of your potential investor is how the money economic or legal conditions that
business to potential will be spent. Will you use it for are subject to change in the near
investors in much the equipment or to hire additional future your risk is substantially
employees or perhaps for research increased. Even if your business has
same way as you sell your
and development for a new improved great potential, if the local economy
product to your customers. product? Again, part of the answer is sluggish to the point that it can’t
on how you spend the money is how support your venture, you need to be
it will benefit the company. aware of this before moving ahead.
Once you have developed concrete answers to these and other pertinent questions, you can begin looking for
financing. One of the first steps is to determine whether to raise funds through debt or share capital. There are
positive and negative aspects to each type. The cost to your company of each type of funding is different, as is
the way in which they are treated for tax purposes. The interest on borrowed money is deductible by a business
for tax purposes, which reduces the effective cost to your company Dividends which you might pay on the same
investment in shares would typically not be tax deductible by your company. In selling shares there usually is no
firm commitment by your company to pay the money back but your shareholder will want, and generally will have,
a legal right to have a voice in the management of your company. When you have made the decision as to the type
of financing you think is appropriate to fit your desires and needs, it is probably a good idea to consult with your
accountant as to alternative types of debt or equity financing available.
28Obtaining Credit and
Financing for Your Business
What is Benefits of
a business plan? a business plan
A business plan is a document that ◆ Clearly sets out your business
describes your business aims and idea.
objectives and outlines how you ◆ Defines your target audience
Business Plan plan to achieve them. It explains
your product or service, strategies,
(essential for a coherent strategy).
◆ Helps you estimate start-up
sales and marketing and finances. costs, income, expenses, profit
and cash flow.
Most people do not have any formal ◆ Essential if you are looking to
training in running a business. So raise money for your business.
writing a business plan is a useful ◆ Makes you set targets and think
Typically, a potential way of making sure you think about how you are going to
lender will want to about all the different elements achieve them.
involved without missing something ◆ Identifies potential problems
know all about you and
important. It shows you how your and how to solve them.
your proposed venture. business will actually work. ◆ Helps you check on progress
Many of these details and keeps you on track.
will have already A business plan helps you
been provided, but
prioritise and make better What should I put
are best provided in a
business decisions when you’re in my business plan?
busy working 24/7. Many
logical consolidated businesses fail because they do not You want your business plan to
format. This format, have proper plans and procedures present you and your business
in place – they find out too late that in the best, but also the most
or business plan, accurate light. Stick to the facts,
their business ideas don’t work in
is a document that practice. not just what you hope will happen.
enables the investor
to readily obtain an Why do you need There are fairly standard
a business plan? component parts to a business
understanding of plan, usually broken down into the
your proposal. It Business plans come in many following:
follows that in order shapes and sizes. They can be
to successfully
written for a variety of reasons, Important components
so it is important to think about of a business plan
raise funding, the who it is for and what it is trying to
business plan should achieve. ◆ Executive summary
be commercial and ◆ Business description
A business plan is usually essential ◆ Management
realistic.
it you are looking for a grant, a ◆ Vision and strategy
loan or trying to raise money in ◆ Products and services
another way. It can help to convince ◆ Customers and competitors
investors, customers, suppliers and ◆ Marketing and sales
potential employees to support you. ◆ Staff and operations
◆ Finance
Focus on your It is also a good idea to share your ◆ Risks
business plan with people who are
business important in your business, like Your plan should look as
plan section your staff. professional as possible, with
a cover, title page, and table of
by section But an effective business plan contents. Plans are typically
makes it more is also for you, so you know you up to about 20 sides of A4 in
are heading in the right direction length, but this can vary widely
manageable. to achieve what you set out to according to the type of business
achieve. Think of it as a roadmap and the purpose of your plan. You
to help you navigate along your might want to include additional
business journey. For this reason, information such as marketing
you need to review and update literature in an appendix, but do
it regularly – not just stick it in a not over-do it and take months to
drawer and forget about it. write hundreds of pages.
29Financing How Do I Get the Money?
Alternatives 1. Banks
The first source of funds, which typically comes to mind when borrowing
money, is a bank, which is why they are in business. Banks typically lend to
small businesses on a secured basis using equipment, stock or debtors.
The more liquid and readily saleable the assets you have to offer as
security, the more acceptable they are likely to be a banker. Loans from a
bank may take several forms such as:
◆ An overdraft limit which is reviewed annually and allows you to borrow
up to a predetermined maximum as you need it and pay it back as funds
from sales and receivables are collected.
◆ A short-term loan that is repayable on specified dates.
◆ A term loan for the purchase of a specific asset such as a computer or a
machine.
As your relationship with your banker becomes better and your business
becomes established, you may consider a longer (3 to 5 years) loan which
will be payable in instalments.
Whether you determine 2. Trade Credit
that debt or equity A very important source of financing for your company may be from the
financing is the best creditors and suppliers with whom you do business. Many suppliers
choice for your company, will originally ask for cash on delivery or, in some instances, they want
there are a number of payment before starting on your order, depending on the nature of your
purchase. Most suppliers will quickly establish trade credit with you
alternative types of
once you have gained their confidence by continuing to do business with
financing available.
them and paying as requested. Establishing good relationships with trade
Depending upon the creditors is essential because it allows you to use the goods and services
nature of your business, in your operations and sell your product to your customers, in some
the financing may be a instance before you pay for them.
combination of debt and The trade credit you build today will be relied upon by other suppliers as
equity and may be tailored you attempt to establish yourself with other suppliers in the future. Trade
to fit the specific needs of credit terms will vary depending on the type of purchase you make, the
industry you are buying from and the industry you are in.
your company.
In the summary we will 3. Lease Financing
In today’s business environment it is quite common to acquire equipment
only mention a few of
through lease agreements. Leasing packages come in a variety of
the more conventional types through many sources. Leasing companies typically will accept a
methods for a young somewhat higher degree of credit risk because they are looking to the
company to obtain capital, value of the equipment for collateral if your business cannot make the
though the possibilities agreed upon payments. For this reason, leasing companies generally
are many. prefer to finance new equipment of a general purpose nature which can be
resold if necessary. Leases often run for a period of three to five years and
because of the risk that leasing companies are willing to take, they are
somewhat more expensive than commercial bank loans.
4. Invoice Finance
To help with cash flow, banks or other financial institutions will agree to
advance you 80-90% of the value of invoices you have sent but which your
customers have not yet paid. Sometimes, the lender will even collect the
money on your behalf, which is called factoring or debt factoring.
Pros & Cons. Invoice financing will give your cash flow a boost and your
customers don’t have to know that you’re borrowing against their invoices. If
you use factoring, you’ll have time to run your business while your lender chases
customers for payment. However, there is a cost for this because you have to pay
the lender interest and other fees and this will eat into your profits.
30You can also read
