When it comes to starting your own business, it is important to identify the right set-up to cater for your individual requirements and those of your business. In order to guide you in this journey, we have set out the three most common set-ups used to start a businesses: the sole trader, the partnership and the company.
The sole trader is the simplest form of business set-up. Like companies and partnerships, sole traders still need to obtain the necessary permits and licences from the Trading Licensing Unit or, depending on the nature of the business, from any other regulatory authority in Malta. They must also apply for a VAT number and, in the event that employees are engaged, due notification must be given to the Employment and Training Corporation.
The sole trader set up is generally preferred by start-ups with low risk profiles due to the attributed cost efficiency, flexibility and privacy. As opposed to companies, there are no administrative burdens such as filing of annual returns and auditing of accounts with the Registry of Companies. Sole traders are also taxed in accordance with applicable personal tax rates as opposed to the flat tax rate of 35% applicable to companies. Consequently, sole traders enjoy the flexibility to apply a lower tax rate than 35% when the net profit of the company does not exceed €60,000.
One disadvantage of the sole trader set-up relates to the level of personal risk being taken on by the entrepreneur. In the absence of limited liability protection, the sole trader is personally liable for the debts of the business and, as a result, personal possessions (such as the residential home) can be at risk in the event of bankruptcy. Another disadvantage relates to how the business is perceived by third parties. In this respect, it is usually the case that service providers or investors often view a limited liability company as more credible since certain information can be independently verified with the Registry of Companies.
Most attributes of a partnership mirror that of a sole trader, with the principal difference being that the former is made up of 2 or more people that jointly operate a business with a common view to profit. The set-ups costs are similarly minimal although there may be some legal expenses to set-up a partnership. Primarily, partners are required to subscribe to a statute to govern matters such as the proportions of interest of the partners, objects of the partnership, official address, termination and other related matters. It is also generally advisable to sign a supplementary partnership agreement to regulate intricacies that relate to the inner workings of the partnership.
There are 3 types of partnership set-ups available under Maltese law being:
- The Partnership En Commandite;
- The Partnership En Nom Collectif;
- The Civil Partnership.
The En Commandite and En Nom Collectif are regulated by the Companies Act and need to be registered with the Registry of Companies. The former partnership is commonly referred to as a limited partnership on the basis that it is only the ‘general partner/s’ that guarantees the debts of the partnership with unlimited, joint and several liability. Other partners (referred to as ‘limited partners’) are only liable to pay any amount, if any, which remains unpaid on their contribution to the partnership.
On the other hand, all partners in a partnership en nom collectif are jointly and severally liable for all the debts of the partnership. In practice, this means that each partner can be held individually responsible for the entire debt of the business in the event that the other partner/s is unable to pay his share of the debt.
In contrast with the en commandite and en nom collectif, the civil partnership is regulated by the Civil Code and the partners are not jointly and severally liable for the partnership debts. They are, however, unlimitedly liable for the debts of the partnership subject to each partners’ proportion of interest in the partnership. There is also no requirement to register the partnership with the Registry of Companies although it may be advisable to register with the Registry for Legal Persons.
As is the case with sole trades, partnerships are generally tax transparent which means that partners are taxed in accordance with applicable personal tax rates as opposed to the flat 35% attracted by companies. The administrative burden is also minimal as partnerships are normally not required to file annual returns and audited accounts.
Aside from liability risks detailed above, partnerships may cause problems in so far as decision making is concerned due to the lack of separation between management and ownership of the partnership. Consequently, different views often serve as a distraction to the operation and progress of a business.
Another disadvantage of partnerships relates to termination which is oftentimes not adequately regulated in the partnership statute or the partnership agreement. In this respect, unless an agreement is reached at the beginning of the partnership, buying out a partner can prove to be a difficult process. Similarly, where the partnership agreement doesn’t provide for a survivorship mechanism, it is also often the case that a partnership is prematurely liquidated when one of the partners decides to quit and the other partners do not have liquidity to purchase the share.
Limited Liability Company
The limited liability company is the most popular vehicle for the conduct of business. To set up a company, one would have to reserve the company name at the Registry of Companies, deposit the share capital in a designated bank account and file the statute (referred to as the Memorandum and Articles of Association) with the Registry of Companies. The minimum share capital required by law to set up a company is that of €1,164.69, out of which 20% must be fully paid up upon incorporation. Essentially, therefore, a company may be opened with as little as €232.94 which must be deposited in a bank account and which can be used by the company (share capital), registry fees payable to the Registry of Companies equivalent to €275 and legal expenses for the preparation of the Memorandum and Articles of Association and, where applicable, for a shareholders’ agreement which is not necessary but usually advisable.
In comparison with the sole trader and the partnership, the company is costlier both to set up and maintain. In fact, companies are obliged to file annual returns and audited accounts. Besides maintenance, companies are also less private. Returns and accounts, the Memorandum and Articles of Association, the identity of the directors, shareholders and other officers of the company are accessible to the public from the website of the Registry of Companies.
Bearing the above in mind, there is a reason as to why the limited liability company is the most popular vehicle for the conduct of business. Principal of all, is the aspect of ‘limited liability’ which generally precludes creditors from satisfying their claims against the personal assets of the shareholders in the event of business failure. This set-up generally makes it easier to file for insolvency and start afresh.
The company is also better suited for good governance due to the statutory distinction between ownership (shareholders) and management (directors) which serves as a basis for checks and balances with shareholders generally having the authority to veto extraordinary decisions taken by the board of directors especially when those decisions could have a material impact on the company.
The Best Choice for You!
When choosing the right set-up for your business, it is not only important to keep the financial and administrative requirements in mind. You should consider the nature of the business and the type of clients you are looking to engage.
If the nature of your business is such that clients would typically expect you to operate through a limited liability company, then you should indeed consider this set-up. Additionally, if the business you operate has a high risk profile then a company can shield your personal assets from potential creditor claims. On the other hand, if you are a freelancer looking for a quick and easy approach you may wish to opt for the sole trader or partnership set-up.
Whatever set-up you choose, it is advisable to periodically review the functionality of your set-up to ensure that your business is adequately supported. In any case, it is important to understand that it is always possible to change your decision at a later date.