knowledge | 14 July 2020 |
Good Company: Choosing the Right Corporate Vehicle Type for Your Start-Up Enterprise
As the economic realities of the COVID-19 pandemic and global lockdown begin to bite, this will be a challenging time for many Irish businesses. However, history has taught us that tough economic climates also yield opportunity as entrepreneurialism emerges from the dark clouds of a recession. IBM, Disney, Microsoft and Uber were all started during times of recession.
For many of those entrepreneurs looking to establish their new venture as we emerge from lockdown, the first step will be to incorporate a new company. Although a relatively simple task, it is important to choose the corporate vehicle that’s right for your business. Every corporate vehicle in Irish law is governed by the Companies Act 2014 (as amended), and is subject to a constitution; a set of rules that are the basis for the company’s relationship with its shareholders, its board of directors, and third parties.
This article sets out the most common company types used by start-up enterprises in Ireland, and outlines some key considerations to be aware of when selecting the corporate vehicle that’s right for you.
The Private Company Limited by Shares
The most flexible vehicle for incorporation of new companies is the private company limited by shares (“LTD”). The LTD has full unlimited legal capacity; this means that is can carry on any business permitted by law, and does not have to set out its “objects” (its purposes) in its constitution. The LTD also has limited liability for shareholders, meaning that should the LTD fail, the liability of the shareholders is limited to the amount that any shareholder agreed to pay for their shares (or the nominal value of those shares – whichever is greater). A LTD can have between 1 and 149 members.
LTDs can have as few as one director, although the LTD with only one director must have a separate secretary. The LTD does not have to state a maximum authorised share capital, meaning that (subject to any limitations in its constitution) the LTD is free to issue shares whenever it is in its interests to do so. The LTD can also avail of certain exemptions from audit (subject to certain limitations) and from the need to hold an AGM where it complies with other conditions set down in the 2014 Act. The LTD must also feature the word “Limited” (or, in Irish, “Teoranta”) at the end of its name, although this may be abbreviated. Most new companies in Ireland incorporate as LTDs, and it is the company type at the centre of Irish company law.
The Designated Activity Company
An alternative vehicle open to companies on incorporation is the Designated Activity Company Limited by Shares (“DAC”). DACs have a number of key differences to LTDs. The constitution of the DAC includes a memorandum of association, which sets out (among other things) the objects and purposes of the DAC. The acts that a DAC can do are restricted by the contents of the objects clause in the memorandum, making the DAC a suitable vehicle where the purposes for which the company is being set up are narrow (such as in certain special purpose vehicles, or in the context of a joint venture).
DACs must have a minimum of two directors and one secretary, although one person may act as both director and secretary to the DAC. Like the LTD, the DAC does not have to state a maximum authorised share capital, and when in compliance with certain conditions, can avail of audit exemption. The DAC also shares the same benefits of limited liability with the LTD. However, where the DAC has more than one shareholder, it must hold an AGM in a given year. The DAC must also feature the words “Designated Activity Company” (or, in Irish, “Cuideachta Ghníomhaíochta Ainmnithe”) at the end of its name, although this may be abbreviated.
Other Company Types
Other company types are available under the 2014 Act, including unlimited companies, public limited companies and companies limited by guarantee. It is also possible for start-ups to take the form of a partnership or sole-tradership. However, unless the circumstances call for it, these approaches are generally less suited to start-up enterprises than the DAC or LTD. We’ll be happy to advise on the start-up vehicle that’s the best fit for your enterprise.
Talk to Us
McCann FitzGerald is a premier Irish law firm. With over 650 staff located in our principal office in Dublin and our international offices in London, New York and Brussels, our specialists are ready to help your business thrive. Our Corporate practice combines with our Company Secretarial and Compliance Services group to offer your start-up enterprise the market-leading advice that you need to grow, from corporate advice on fundraising and governance, to day-to-day advice on compliance matters – leaving you free to focus on developing your business. Please contact any member of the McCann FitzGerald Start Strong team to assist.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.