Kick-start for start-ups? New Companies Bill - Mazars - Ireland

By 2013 Ireland will have a new legal framework for small firms. What it needs is a new tax regime as well. Read more on new Companies Bill.

With small and medium enterprises (SMEs) accounting for well over 90 per cent of all Irish non-financial businesses and almost 75 per cent of employment these workhorses of the economy have never received proper recognition. That seems set to change and not before time. After many years in the drafting office the Bill setting out a new legal framework for SMEs has seen the light of day. From the legal and institutional perspectives, for Irish business probably the single most important event in the life of the current government has happened, the publication on May 30th of the new Companies Bill – or rather ‘Pillar A’ of the Bill. At over 1,400 pages and 952 sections and with Pillar B (perhaps another five to seven hundred pages) to come this is a monster. In the legislative history of this State there has been nothing like it. There have been short, very short, enactments that were arguably much more significant for society as a whole – for example the European Communities Act 1972. But the Companies Bill when enacted will shape the legal environment for all of business in Ireland.

Company law in Ireland on the face of it dates back to the Act of 1963, to the State’s first companies act. But of course it is not as if there was nothing before that: the British framework – and associated case law – was inherited. Common Law precident remains a living force in the courts. Philosophically British company law is built around the public company (plc), it is securities legislation in effect. The new Irish Bill departs from this approach on the ground that the predominant corporate form in Ireland is the private company – a point long made by Thomas Courtney, who, as chair of the Company Law Review Group (CLRG) can be regarded as the father of this piece of legislation. In his introduction to the Bill Courtney remarks

The private company has been the work-horse of commercial life in Ireland since that form of registered company was first permitted under the Companies Act of 1907 and today almost nine out of ten registered companies are private companies. Ironically, the current Companies Acts view the private company as a peculiar variation of the public company, giving rise to a classic case of the tail wagging the dog.

Pillar A creates a new framework for private companies in Ireland. Pillar B will deal with all other company types – plcs, guarantee companies and so on. That hardly amounts to a ‘quake? Actually yes, it does have the makings: as Minister Bruton has commented in his introduction, Pillar A contains

… all of the law which will apply to what will become, under the proposed new legislation, the default company type – the new private company limited by shares, or “cls” to use its abbreviation. The cls will offer a number of attractive practical benefits which will make it easier to start, to use, and to run a company. For example, such a company will only be required to have a minimum of one director, as opposed to two under the current law. Immediately this will make it easier for an entrepreneur to use a company to start a business on his or her own. The complex legal doctrine of ultra vires, which has applied to all companies up to now, will not apply to the new cls. Neither will a cls be required to draft a long document containing its Articles of Association … consequently the current requirement for lengthy, complex documents at the time of incorporation of a new company can be replaced by a single-document, and possibly single-page, Constitution under the proposed new law. The cls will also be permitted to hold its AGM by written procedure …

The cls seems conceptually to be somewhat akin to the LLC (limited liability company), since the 1990s widely adopted by state governments throughout the US (company law is a state rather than a federal matter in the US). The LLC has been promoted in the US for much the same reason as it is proposed to adopt the cls in Ireland: to ease business start up and entrepreneurial development and activity. One interesting feature of the LLCs is that IRS gives them the option to file as S Corporations for tax purposes thus avoiding double taxation and functioning as “pass-through” vehicles, in effect introducing distributed profit base for company taxation in the case of SMEs. This is tricky territory politically: one can see the headline, ‘zero tax for companies’ even though it is not that at all. It also raises genuine tax issues for example relating to close companies and indeed thin cap rules. Government may wish to avoid these areas but, without doubt tax treatment of SMEs is as critical an issue as are those of access to bank finance and the provision of partial guarantees.

The Bill as published is not set in stone – and of course is incomplete. It has been published in its current form and this far ahead of coming onto the parliamentary schedule precisely because of the scale of the project and to allow time for stakeholders to parse and analyse it – and suggest changes. The general scheme for Pillar B is also available giving an outline of the drafting plan to which the legal drafters are working. Business people and their advisors would be well advised to familiarize themselves with the statutory framework to take effect probably at some point in 2013. The occasion should also be used to open up a wider debate on SME policy.