It is well-established principle of Irish company law that a company is an entirely distinct and separate legal person from its shareholders.
Accordingly, it is a company (as a separate legal person) which is liable for its debts and obligations. A benefit for shareholders, who incorporates as a limited liability company, is that the liability of the shareholders in respect of the debts and obligations of that company is limited to the amount, if any, remaining unpaid on the shares held by them, save in exceptional circumstances.
A company only ceases to exist where it is wound up or struck off the register of companies. This makes it easier to transfer on the business by way of share sale, because the existing contracts continue in place with the company until a winding up or strike off.
A business transfer agreement should be put in place in order to effectively transfer the relevant business and assets which in turn may require assignment of a number of existing contracts. Such a transfer of the business is also likely to trigger the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003, which (broadly speaking) entitles the employees of that business to transfer to the company on the same terms.
There are additional administrative and filing requirements which apply to a company but not to partnership. These include requirement to keep proper books of account which give ‘true and fair’ view of the state of affairs of that company, to present annually the accounts to shareholders at the annual general meeting and to file the accounts with the annual return in the Companies Registration Office. If there is concern in relation to public liability of a company’s accounts, it is possible to implement a structure such that the company would not have to file its accounts, whilst maintaining the protection of limited liability.
It would be prudent for the shareholders in the company to put in place comprehensive shareholders’ agreement (to deal with matters which may previously have been managed in accordance with a partnership agreement), including for example: company structure, administrative issues, financing and shareholder rights and obligations.
The tax heads to be considered on incorporation include capital gains tax, income tax, stamp duty and VAT. Where possible, it will be necessary to structure the incorporation so as to avail of existing reliefs and exemptions in respect of theses tax heads. With appropriate planning it is possible to minimise any potential tax costs arising.
Corporation tax at the rates of 12.5% (on profits derived from the professional services provided by the company) and 25% (on passive income such as rental income and deposit interest) should apply.
Additional tax only becomes payable when the shareholders wish to extract the income from the company.
The new company will, in many cases, be regarded as a close company (i.e. a company that is controlled by five or fewer persons). Consequently, there are certain tax implications for close companies to consider.