CPA Ireland has put together an official guide to starting your own business. This guide was published to provide advice to both Start-Ups and SMEs on the essential legal, tax and accountancy considerations that must be considered when starting a business. The guide is broken into three parts and will run over smallbusinesscan.com over a three week period.
The Institute of Certified Public Accountants in Ireland Business Guide to Starting your own Business.
Part 1 – Things to Consider Before You Start
Before Starting Up
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 company car, regular hours and holidays.
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.
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.
A sole proprietorship is typically a business owned and operated by one individual. A sole proprietorship is not considered to be a separate legal entity under the law, but rather is an extension of the individual who owns it. The owner has possession of the business assets and is directly responsible for the debts and other liabilities incurred by the business. The profit or loss of a sole proprietorship is combined with the other income of an individual for income tax purposes.
A sole proprietorship is perhaps the easiest form of business to own and operate because it does not require any specific legal organisation, except, of course, the normal requirements such as licenses or permits. A sole proprietorship typically does not have any rules or operating regulations under which it must function. The business decisions are solely the result of the owner’s abilities.
In a partnership, two or more individuals join together to run the business enterprise. Each of the individual partners has ownership of company assets and responsibility for liabilities, as well as authority in running the business. The authority of the partners, and the way in which profits or losses are to be shared, can be modified by the partnership agreement. The responsibility for liabilities can also be modified by agreement among the partners, but partnership creditors typically have recourse to the personal assets of each of the partners for settlement of partnership debts.
The rights, responsibilities and obligations of partners are typically detailed in a partnership agreement. It is a good idea to have such an agreement for any partnership. A partnership is a legal entity recognised under the law and, as such, it has rights and responsibilities in and of itself. A partnership can sign contracts, obtain trade credit and borrow money. When a partnership is small, most creditors require a personal guarantee of the general partners for credit.
Partnerships are obliged to prepare accounts.
A limited company is a separate legal entity that exists under the authority granted by the Companies Acts. A limited company has substantially all of the legal rights of an individual and is responsible for its own debts. It must also file tax returns and pay taxes on income it derives from its operations.
Typically, the owners or shareholders of a limited company are protected from the liabilities of the business. However, when a limited company is small, creditors often require personal guarantees of the principal owners before extending credit. The legal protection afforded the owners of a limited company can be useful. A limited company must file accounts at the Companies Registration Office.
Incorporating a business allows a number of other advantages such as the ease of bringing in additional capital through the sale of share capital, or allowing an individual to sell or transfer their interest in the business. It also provides for business continuity when the original owners choose to retire or sell their shares.
Business Structure – The Pros and Cons
|A company must be formally incorporated||The business name needs to be|
|with a written constitution. There is an||registered at Companies Registration|
|initial setup cost, and the business name||Office, but otherwise there are minimal|
|needs to be registered at Companies||formation costs. However, a written|
|Registration Office.||partnership agreement is advised.|
|Companies are governed by the||Sole traders and partnerships are not|
|companies Acts. A company must:-||required by law to have annual accounts|
|– Keep accounting records||nor to file accounts for inspection.|
|– Produce audited accounts, unless||However, annual accounts are necessary|
|eligible for Audit Exemption.||for the Revenue self assessment tax|
|– File accounts and an Annual Return with||returns.|
|the Companies Registration Office. This|
|information is available to the public.|
|– Keep Statutory Registers and Minute|
|Companies may have greater borrowing||Sole traders and partners are unrestricted|
|potential. They can use current assets as||in the amount and purpose of borrowings|
|security by creating a floating charge.||but cannot create floating charges.|
|Shares in a company are generally|
|transferable, therefore ownership may|
|change but the business continues.|
|Incorporation does not guarantee reliability||The unincorporated business does not|
|or respectability but gives the impression||carry the same prestige.|
|of a soundly based organisation.|
|Personally, there may be prestige|
|attached to directorship.|
|A company pension plan has greater|
|First year losses in a company can only be||Losses generated by a sole trader or a|
|carried forward to set against future||partner can be set against other income of|
|profits.||the year or carried back to prior years.|
|All funds withdrawn must be by salary or||Taxation is calculated on profits and|
|dividend and an immediate tax charge||PAYE/PRSI is not a factor.|
|arises in the month.|
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 when you start a business as a self-employed person/sole trader. You must do this online using the Revenue Online Service – ROS, through the online eRegistration Service if you are:
- An individual who is currently registered for PAYE Anytime;
- An individual who is currently registered for Revenue’s Online Service – ROS
- Represented by an Agent.
ROS is Revenue’s internet facility which provides you with a quick and secure facility to register for tax, pay tax liabilities, file tax returns, access your tax details and claim repayments. The facilities are available 24 hours a day, 7 days a week, and 365 days a year. You will also benefit from an extension to existing deadlines for paying tax and filing returns where you both pay and file using ROS. Further information on Revenue’s online service can be found at www.revenue.ie.
There are a limited number of customers where paper registration applications are still accepted – you will find details of those customers at eRegistration Service. Paper applications received where the applicant is required to submit the application on-line will not be processed and the paper application will be returned for completion on-line.
The TR1 form can be used to register for any/all of the following:
- Income Tax
- Employer’s PAYE/PRSI
- Value Added Tax
- Relevant Contracts Tax
Form RBN1 needs to be completed by a sole trader (Form RBN1A for a partnership) to register any business trading name and this is filed at Companies Registration Office with a fee of €40 (or filed online for €20).
If a company is being set up, you first need to register with the CRO. A form A1 needs to be completed and sent with the Memorandum and Articles of Association and a fee of €100 to the Companies Registration Office (€50 if filed online). If the trading name is different from the company name then form RBN1B needs to be completed and sent to Companies Registration Office with a fee of €40. Once you have received your CRO number you can then register on-line with ROS or a paper form TR2 needs to be completed for the Revenue Commissioners.
Accounting and Bookkeeping
Most operators of a new and growing business have a flair for the environment in which the business operates. They may be a great salesperson, an outstanding mechanic, carpenter, solicitor, or inventor. Unfortunately, most people don’t like to keep the books. As an owner 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 and the underlying records will provide the basis for many decisions made by outsiders such as banks, landlords, potential investors, and 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 businesses is not keeping good financial records and making improper or poor business decisions based on inadequate information.
Quality financial information does not necessarily translate into complicated bookkeeping or accounting systems. Far too often owners of businesses become overwhelmed by their accounting system to the point where it is of no use to them. An accounting or book-keeping system is like any tool used in your business; it needs to be sophisticated enough to provide the information you need to run your business and simple enough for you to run it (or supervise the book-keeper). Questions you should ask in developing an accounting and financial reporting system are:
- Who will be the users of the financial information?
- What questions do I need answered to manage the business?
- What questions should be answered for the Revenue Commissioners and other authorities?
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 accounting system is the chart of accounts. It is this chart that helps establish the information that will be captured by your accounting system, and what information will subsequently be readily retrievable by the system. This tool, like the rest of the accounting systems, needs to be dynamic and should grow as the size and needs of your business changes.
To help establish a good working chart of accounts you need to answer some questions, in conjunction with your accountant, as to how your business will operate and what is important to you. Some of these considerations might be:
- Will your business have stock to account for? If so, will it be purchased in finished form or will there be production costs?
- Are fixed assets a significant portion of your business?
- Will you sell only one product or service or will there be several types of business?
- Will you have accounts receivable from customers, which you will have to track?
- Are you going to sell in only one location or will you do business in several places?
- Are the products you sell subject to value added tax?
- Do you need to track costs by department?
- What type of government controls or regulatory reporting are you subject to?
Each one of these questions can have several answers and will probably generate more questions. Each answer will have an impact on how the chart of accounts is structured. It may seem that developing a chart of accounts is not particularly high on your list of things to do as you start a new business; the amount of time and money which a well organised accounting system may save you can be significant as the need to generate information for various purposes increases. An example of a basic chart of accounts follows this section.
Cash or Accrual Accounting
One of the decisions to be made as you start a business is whether to keep your records on a cash or accrual basis of accounting. The cash basis of accounting has the advantage of simplicity and almost everyone understands it. Under the cash basis of accounting you record sales when you receive the money and account for expenses when you pay the bills.
Unfortunately, as we all know, the business world is not always so easy. Sales are made to customers and you sometimes must extend credit. Your business will incur liabilities which are due even though you may not have received the invoice or have the cash available to pay them.
Most users of financial statements such as bankers and investors are used to accrual-basis statements and expect to see them. Once you become familiar with them, they provide a much better measuring device for your business operations than cash-basis statements.
Whether you use the cash or accrual basis, it is possible to keep books for income tax purposes on a different basis than for financial statements. It may be more advantageous (less tax) for you to do so.
Accounting Records and Record-keeping
Another question that the owner of a business must answer is “Who will keep the books of the business?” Will you do it yourself, will the receptionist or a secretary double as a part-time bookkeeper, will you have a bookkeeper that comes in periodically, or will the volume of activity be such that a full-time bookkeeper will be required?
Very often the owners of a business decide to keep the books themselves and underestimate the commitment they have made to other phases of the operation and the time required to maintain a good set of financial records and books of account. As a consequence, the record keeping is often low priority and must be caught up later. This approach, though rarely planned, can require a substantial expenditure of time and money. While it is important for the owners of a business to maintain control and stay involved in the financial operations of the enterprise, this can be achieved by maintaining close control over the cheque-signing function and scrutinising certain records. Your company’s accountant can help develop a good programme of record-keeping duties for you, your employees and any outside book-keepers or accountants you may engage.
A Word about Computers
The computer is probably the single, most valuable, invention for bookkeeping and accounting since the advent of double entry bookkeeping.
There are a number of very good and easy to use accounting software systems which are commercially available, but none of them will solve the problems of inaccurate or poor quality financial records. All they will do is generate bad information faster. This is one of the reasons that the computer has also probably caused more headaches for the owners of modern businesses than any other single cause. If you want to use a computer-based accounting package, either in your own business, with a service bureau, or through your accountant, it is imperative that you generate accurate information to be entered into the system.
The real value of the computer becomes apparent once it is running smoothly in your business. Your accountant can then function in the capacity for which he was trained, not as a “number cruncher”, but as your business advisor, consultant and strategist. Both of you can focus not on producing reports for various regulatory agencies but on analysing your business to make it more profitable.
What is internal control? It is the system of checks and balances within a business enterprise that helps to ensure that the company’s assets are properly safeguarded and that the financial information produced by the company is accurate and reliable. When you are operating as a “one man shop” or at least handling all of the company’s financial transactions, maintaining good internal accounting control is relatively straightforward.
However, when your company grows to the size where you must delegate some of the functions, it becomes more difficult to ensure that all the transactions are being accounted for properly.
No matter the size of your business, you should always be able to answer “YES” to the following questions:
- When my company provides goods or services to our customers am I sure that the sale is recorded and the debt is recorded in accounts receivable or the cash is collected?
- When cash is expended by my company am I sure we received goods or services?
The method used to ensure that these two questions can be answered affirmatively will be widely varied. They are essential stepping-stones to maintaining good control in your business. The solution in your particular instance may be as simple as numbering the sales tickets and being sure ALL TICKETS ARE ACCOUNTED FOR or reviewing all invoices and timecards before signing company cheques. These are fundamentals in a well-run business. As the company grows you will need to consider concepts such as segregation of authority or controlled access storerooms.
No matter what the size of your enterprise, you should consider controlling your business and safeguarding hard earned assets as a priority from the outset.
Illustrative Chart of Accounts
|FIXED ASSETS – TANGIBLE|
|0010||Freehold property cost|
|0110||Leasehold property cost|
|0210||Plant and machinery cost|
|0220||Plant and machinery|
|0410||Motor vehicles cost|
|0420||Motor vehicles depreciation|
|FIXED ASSETS – INTANGIBLE|
|1000||Stocks and work in progress|
|1103||Debtors and prepayments||*|
|1200||Bank current account||*|
|2100||Purchase ledger control||*|
|2109||Creditors and accruals||*|
|2200||VAT control account||*|
LONG TERM LIABILITIES
2600 Bank loans
2700 Hire purchase creditors
2800 Lease purchase creditors
2900 Other loans
CAPITAL AND RESERVES
3000 Capital account – balance brought forward
3100 Capital introduced
3200 Profit and loss account
* denotes control accounts
4000 Sales/work done
4009 Discounts allowed
4100 Export sales
4200 Royalties received
4210 Commissions received
4220 Insurance claims
4230 Rental income
4240 Bank interest received
COST OF SALES
5900 Opening stock and work in progress
5950 Closing stock and work in progress
6000 Direct labour
6100 Goods outward costs
6200 Goods inward costs
6400 Duty paid
6500 Transport insurance
6600 Sales commission payable
6700 Royalties payable
|7500||Heat and light|
|7600||Postage, stationery and|
|7700||Repairs and renewals|
|7900||Bank charges and interest|
|8000||Hire purchase interest|
|8300||Use of home as office|
|8800||Profit on asset sales|
|9000||Bad debt write off|