The facilities to register and initiate a business organization, the likelihood of avoiding bureaucracies and formalities and the possibility to maintain full control of the business are advantages of a sole trading organization states Cole (1996). Additionally, when considering cost factors, it is only twenty euros to register a business, which is consider-ably low to have a business name registered (Lambe, 2015).
Nevertheless, Finegan (2018) points out that even with the right prerequisites for start-ing this type of business, sole traders are still responsible for all aspects of the business such as purchases, sales, tax payments and marketing. Moreover, as mentioned by Cole (1996), and most recently supported by the observations of Dyson (2010), the risks of initiating a business as a sole trader are significant, when considering that the owner is completely liable for eventual debts, and can also be personally sued for any fatality, accident or situation that occurs within the business. Dyson (2010), supports this, stating that, in the case of bankruptcy, the owner is required to fully pay for all their financial obligations, even if the company has already closed down. Douglas (2012) supports this line of argument, going as far as to say that there is actually no difference between the owner and the business, simply put, the owner is the business, and in case of death, the business automatically ceases to exist.
Income Tax Rules are applied to sole traders, meaning that all profit accumulated by the company is taxable at a standard rate of up to 52 %, in view of the fact that the owner is considered to be self-employed. Nevertheless, according to Cole (1996), it is possible for sole traders to claim tax deductions in the form of admissible expenses related to the business. Finegan (2018) even goes as far as to state that a sole trader’s wages are called drawings, and that all profit made by a company can be totally kept by the business’ owner with no further taxes applied.
For Cole (1996) a partnership consists of two or more people agreeing on joint owner-ship of a business, with O’Flaherty and Brick (2009) similarly describing a partnership as two or more soles traders who decide to engage on a business together. The possibility to share responsibilities, knowledge and skills between the partners are just some of the many advantages that (Cole, 1996), as well as O’Flaherty and Brick (2009) point out. Nevertheless, Cole does emphasise the importance of having a formal agreement con-cocted by a qualified attorney, where liabilities are specified, and any future actions are specifically stated.
O’ Flaherty and Brick (2009) observe that in a partnership, similar to what happens in a sole trading entity, all partners have equal and unlimited liability, thus can be personally sued, or have assets taken away from them in the case of any debts.
Solicitors, doctors and accountants are examples of professions that are legally not enti-tled to commence a limited company (Douglas, 2012), motive why Gorry (2009) points out that partnerships are especially popular among these professionals.
As Finegan (2018) explains, in a limited company, assets and liabilities of the business are unconnected to its owner; who is considered to be another employee. That is, the company is a separate entity, protected by, and subjected to, its own legislation.
It is not uncommon to begin as a sole trading entity and then later, with the company well-established in the market, switch to a limited company. Lambe (2015) adds that the most attractive reasons to incorporate a business are the low corporation taxes ap-plied to any profit, at a rate of only 12.5 %. In addition to this, there is the possibility to negotiate the company’s shares, thus creating the scope to drastically increase invest-ment potential.
Although the costs to start and run the business are higher, Lambe (2015) points out that, in comparison to a sole trader, limited companies tend to be more favored, and have easier access to credit from banks and other lenders. Nevertheless, Cole (1996) contradicts this, arguing that it is not actually all that easy for small companies to borrow the necessary or desired amount of money from credit institutions, due to the risks in-volved in the case of insolvency of the business.
Finally, before an incorporation, all limited companies must complete numerous proce-dures. As Douglas (2012) points out, this includes the completion of a Memorandum of Association, which should contain all required information, such as name, location, aim and share capital. Additionally, all information included in the Memorandum has to be fully available, so as to allow consolation by the public, as well as employees, lenders and investors. Additionally, Lambe (2015) stresses the importance of the Memorandum of Association, pointing out that a limited company cannot engage in any activities other than those stated within the memorandum documentation.
Comparison Between the Entities
In comparison to a trading entity, starting a business as a limited company demands more time due to the bureaucracy involved, whilst, as Lambe (2015) notes, the costs to open and close the company can also be significantly higher. Mepham (2015) also draws attention to the fact that a limited company can only offer services for what is officially registered in the Memorandum of Association, making it somewhat limited. In relation to this, Lambe (2015) points out that, depending on the situation, initiating a business as a sole trader can look more attractive for certain professionals, due to a larger flexibility offered. In other words, the possibility to work in different paths, establish a name in the market, and thereafter develop into a limited company.
Nevertheless, there are disadvantages to a sole trading entity, in that it has unlimited liability, and the owner is fully responsible for any financial obligation of the business. As well as this, as Lambe (2016) argues, many contractors will only issue a deal with limited companies, which can result in a limited company appearing more credible when firming larger contracts.
Recommendation for Bob’s Business
Bob intends to enter into the food sector by opening a hot dog stand in the Temple Bar premises. He has recently been made redundant, and will, therefore, be limited to a small loan, employing only a handful of workers to help him initiate the company. Due to the small investment, the risks will be relatively low.
As indicated by Mepham (2015), starting up as a sole trading entity may be advanta-geous for people beginning small businesses, due to the minimal start up costs. With this in mind, the initial recommendation would be to begin as a sole trader, and, if success-ful, consider expanding the business into a limited company.
Additionally, due to the nature of his business, Bob would need to keep in mind that, according to the Food and Safety Authority in Ireland (2019), the creation of a food safety method is required and must adhere to the guidelines set out in the HACCP (Hazard Analysis and Critical Control Point). In order to do this effective-ly, there must be a traceability system put in place, ensuring the safety of the food pro-duced, as well as a system that recognises, controls and prevents any risk to the food. The importance of this cannot be undermined, with Douglas (2012) highlighting the impossibility of legally engaging in the food sector, without possession of such docu-ment.
According to Cole (1996), business planning is essentially the compilation of an im-portant written document, describing detailed information about the business goals, methods and ethics implemented to achieve all targets. To illustrate the importance of a business plan, a research study conducted by (Greene, 2017; Hopp, 2017) found that a business is 16% more likely to achieve success with a recorded business plan than those which initiate activities without such a document.
Summarized by (Bendrey et al., 1996), the contents of a business plan are typically made up of a company’s description, with regard to the services it offers, as well as the business entities’ long-term purpose and goals. There must be a focus on the necessary requirements to develop the business, a sales strategy that shows awareness of the par-ticular business market segment, as well as an analysis of the people involved in the business; this includes possible investors, employees and future clients. Last but not least, there must be a financial forecasting, followed by cash flow projections. This must be accessible to banks, creditors, potential investors or any other interested part. (Cole, 1996). An analysis of the political, economic, social and technological – PEST analyse – is essential, according to Douglas (2012). In addition to this, Cole (1996) asserts that a “SWOT analysis”- Strengths, Weaknesses, Opportunities and Threats – must be conducted when planning a business asserts Cole (1996). Strengths and weaknesses are viewed in terms of internal factors, such as, the reputation of the entity or product offered, location, pricing and profitability. Opportunities and threats are looked at in terms of external factors including changes in the law and in the market, as well as in public opinion. In simple terms, what Douglas (2012) refers to as, ‘that which a business cannot control’.
When considering external factors, Cole (1996) acknowledges that these can change frequently, and, therefore, he advises that business plans should be made on a 3-5-year basis, then reviewed again later, in order to be most effective. (Mepham, 2015), supports this sentiment, highlighting the importance of setting short term, achievable targets, that are in line with any current external factors.
Irish Hospitality Sector Overview, its Contribution to the Economy and Cur-rent Threats
Having the 5th highest GDP per capita in the world (The World Bank, 2017) and sitting in 11th place out of 161 counties, Ireland figures as one of the best countries to do busi-ness, and an attractive place for new investors (Taylor, 2018).
The hospitality sector in Ireland has an important role in the Irish economy. Reported by Slattery (2018), the hospitality sector was estimated to be worth €7.2 billion pounds in 2018, generating more than 235,000 jobs. Despite this being an impressive figure, The Central Statistics Office (2019) revealed there were more than 10.6 million overseas visitors in 2018. This is a particularly shocking number, considering Ireland’s population of only 4.8 million. (Central Statistics Office, 2018).
Although the industry experienced a seventh consecutive year of growth in 2018 (Mul-ligan, 2018), according to a statement from the president of the Restaurants Associa-tion Liam Edwards, the sector has faced a moment of uncertainty and preoccupation with the haziness surrounding Brexit, and the rise of VAT from 9% to 13.5% an-nounced by the government last year (Edwards, 2019). In addition, as stated by the (Irish Beverage Federation of Ireland, 2018), Ireland’s exorbitant tax rates on alcohol, the second highest in Europe, contributes to the unstable moment in the Irish hospitality sector and threatens to put Ireland’s international tourism at risk.
Despite the current high success and rapid expansion in the country, the hotel’s business sector has been challenged with a shortage of employers, and, as reported by Slattery (2018), there is a fear that soon the demand will exceed the supply, putting the continued growth in danger. Mulligan (2018) observes that as a result of the staff scarcity in the sector across Ireland hotels, there has already been an increase in payroll costs. Despite this, Mulligan (2018) pays deed to the fact that hotel profitability has steadily increased in the last few years contributing to a continuous rise in investments across the country.
It is of key importance for the business’ owner to decide the best company’s structure, taking into account the size, level of liability exposure, nature of the business, as well as its required initial investment. Throughout the course of this essay, I have analysed three types of legal structure, observing their difference in many aspects such as the legislation applied, cost of taxes, bureaucracies and requirements to initiate the company.
This essay provided an elementary understanding of the definition of a business plan, exploring its contents, as well as providing a description of the principal points that should be included in a plan, in order to make it a useful source of reference.
A recommendation was given to John’s business explaining why he should start as a sole trader, taking into consideration his financial situation and proposed business idea.
Finally, this essay discussed the Irish economy’s current position, looking at its consid-erable growth in the last years, with the hotel sector benefiting from high profitability levels and rising levels of investments. Despite the steady growth that has manifested in the creation of an environment that has great business potential, it was observed that the industry has been challenged by a moment of incertitude, due to external factors such as Brexit, a shortage of employees, and the raise of VAT.