• As a sole trader
• As a partner in a partnership or
• Through a private limited company

There are many differences between each type in respect of the taxation treatment of profits and the legal obligations and the distinction between the individual and the business entity. A sole trader or a partner is liable to income tax on business profits while a company pays corporation tax. A company is a separate and distinct legal entity from the shareholders and offers the protection of limited liability. A sole trader’s business is tied directly to the individual. A partnership business is separate from the individual but each partner is jointly and severally liable for the liabilities of the partnership business. Each of these is covered in more detail below.

A typical partnership consists of a group of individuals carrying on business in common with a view to making a profit. The number of partners can vary between a minimum of two persons and a maximum of twenty partners. A partnership may commence business without any formality. Such a partnership is governed by the provisions of the Partnership Act, 1890 and the contents of any partnership agreement drawn up by the partners. The terms of a partnership may be varied or changed with the agreement of the partners. Each partner has the right to be involved in the management of the business and every partner is jointly and severally liable for the debts of the partnership without limit. All partners are bound by any contract that a partner enters into for partnership business purposes. Partnership decisions are usually made by a simple majority. There are special tax rules that dictate how the profits/losses and capital allowances of a partnership are taxed. Assets used for the business of the partners may be either partnership property or belong to one or more of the partners in a personal capacity and be rented to the partnership. Unlike a company, a partnership does not have to disclose its accounts.

The Limited Partnership Act, 1907 provides that some of the partners may have limited liability. Such partnerships were frequently used for tax schemes that allowed non-trading partners to benefit from tax losses and capital allowances of the partnership. Special anti-avoidance tax rules have been introduced that make such tax schemes ineffective.

Once formed a partnership continues until only one partner remains or the partners agree to dissolve the partnership. It is possible to sell or transfer an interest in a partnership but the person acquiring the interest must generally meet with the approval of the other partners. In addition the partner leaving is not released from all his liabilities to the creditors of the partnership unless the creditors release him from such liabilities or the incoming partner agrees to step into the shoes of the departing partner.

Forming a partnership with one or more of your children is a useful way to introduce them to the business as it is possible to keep the assets in your own name while allowing the partnership to run the business. The business profits may be divided equally among the partners or as provided for in the partnership agreement to recognise level of involvement in management decisions, time input, experience, seniority etc. Partners are liable to income tax on their respective share of the partnership profits.

You should exercise care when forming a partnership with others, as you will be jointly and severally liable for the debts and liabilities of the partnership. Ensure that you can trust the other partners and also keep yourself up to date with all aspects of the partnership business.

In choosing whether to carry on business as a sole trader, partner or through a company you should take both commercial and taxation factors into account and the advantages and disadvantages of corporate status must be considered. Generally, while the business is small or in a loss-making phase a sole trade or partnership is preferred as losses incurred may be offset directly against the individual's other taxable income. If such losses are incurred in a company they may only be carried forward and set against future company profits. Administration costs are higher for a company; as a full audit must be carried out and annual returns must be filed with the Companies Office that\ results in a certain loss of confidentiality for the business.

Business profits of a sole trader or partner are subject to income tax as they are earned. Company profits may be retained in the company and will be subject to corporation tax. Extraction of these profits to the shareholders is usually by way of salary or dividend, both subject to income tax. Click for more information.. Company structures afford excellent opportunities for pension planning.

Frequently a small business is initially carried on as a sole trade or partnership,. Losses incurred during the start-up period may be set directly against the individual’s other income and keeps costs to a minimum. As the business grows the decision to incorporate the business may be taken with careful consideration given to the timing to minimise the tax costs and avail of the various reliefs available.

Care should be taken in relation to the ownership of the property in which the business is carried on. Generally, it is preferable to hold the property in the name of the individuals to minimise the tax costs on a subsequent disposal of the property. Holding a property that appreciates in value within a company can result in a double charge to capital gains tax when the property is sold. First the company pays capital gains tax on disposal, and then as the net proceeds are extracted from the company, a charge to capital gains tax or income tax will arise for the shareholder. The only way to avoid this double charge is to sell/transfer the shares in the company, in other words dispose of the business and the property at the same time. The company continues to own the property and the only charge to capital gains tax is on the disposal of the shares.

The Registrar of Companies will however refuse to register a company with a name already in use or similar to that of an existing company or one which has recently been dissolved or struck off the Register.

A company has flexibility regarding both ownership and distribution of profits. Small or large blocks of shares can be issued, transferred or bequeathed relatively easily. Profits may be retained, distributed as directors' salaries and fees and/or paid out as dividends. In addition constitutional changes may be dealt with more easily than in a partnership, where disputes, retirements and admission of partners can produce unwieldy legal and taxation problems. In a family controlled company family members may hold office as company directors and/or company secretary.