Legal Structure – Trading Structures in Cyprus – Sole Trader, Limited Company, General or Limited Partnership?
What type of business structure will you use for you business in Cyprus? Will you be a sole trader, in a partnership, or a company? There are advantages and disadvantages to consider for each. Choosing your business structure in Cyprus is an important decision, so you need to investigate each option carefully.
When making your decision, consider whether your activity is a business, or a hobby. Remember that to be able to claim business deductions you must be carrying on a business. Other factors to consider are the cost of set-up, the taxation implications, the expense of ongoing administration and your personal financial liabilities.
The two most common small business types in Cyprus are sole traders and limited companies.
Sole Trader
To operate as a sole trader you are essentially self-employed. Your business income will be counted alongside any existing personal income you may have, which makes the accounting side of your business about as straightforward as it can be. This proves a proposition too good to pass up for many business starters – and when you’ve got a dozen things to worry about at any one time, the last thing you’ll need on top of this in the early days is a complex accounting and administrative structure. Getting behind on your accounting is not to be recommended!
If you want to make changes to your business, the sole trader route offers much less paperwork, as well as giving you complete control over your own accounting.
The major downside is that should your venture run into financial trouble, you and you alone are responsible for sorting it out. People you owe money too can claim your personal assets such as your house. Equally, you are restricted in certain ways in terms of the name you can choose for your business. A further disadvantage about setting up as a sole trader in Cyprus is that can be very expensive to operate from a tax point of view bearing in mind that the Cyprus tax rates that apply to individuals can reach 30% whereas 10% apply for all corporations.
Limited Company
In contrast, many go for the limited liability company option. “Limited” means that the company’s finances are separate from your own personal assets, unlike with the sole trader option. If everything goes wrong, you will only lose the money you have put in – no-one can claim against your personal assets.
To get money out, you must become an employee of the company and be paid either with a salary, or by taking the profits out (known as dividends). Many people starting businesses prefer to go the limited liability route. It looks more professional and has a lot less risk if you need to buy a lot of equipment or rent expensive premises, such as a shop or an office.
Partnership
The Partnership structure offers yet another option for those who want to go into business with a partner or two, but without any of the legal confines of the limited company route. Unlike a limited company set-up, a partnership has no legal standing, but is just a non-complex way of linking two or more people together in a business structure.
In Cyprus the Partnership and Business Names Law Chapter 116 provides for two types of partnerships, the General Partnership and the Limited Partnership
In the General Partnership every partner is liable jointly and severally with all the other partners for an unlimited amount for the debts and obligations of the Partnership. Partner can also be a company with limited liability or another Partnership. The partners of a Partnership may be only companies with limited liability, or only Partnerships or both.
The Limited Partnership is a Partnership in which at least one of the partners must have unlimited liability for the debts and obligations of the Partnership, whereas the remaining partners may have limited liability. Limited liability companies may also be partners in a Limited Partnership, as the partner with unlimited liability.
This option involves more administrative work, along similar lines to being a limited company.
The minimum number of partners required for Partnerships, whether general or limited is two and the maximum is twenty.
Neither partnership is a distinct legal entity but it can sue or be sued in its own name. The concepts of a limited liability partnership (LLP) and a limited liability limited partnership (LLLP) are not recognized under Cyprus partnership law.
All in all, you are best advised to consult a professional business adviser, accountant or solicitor for advice. Depending on the nature or your business and projected turnover, they will know which option is best for you in the long-term, both to balance out the risk and ensure you can maximize your profits.
For more information on choosing between the various types of business entities in Cyprus, visit our dedicated section under Types of business entities in Cyprus.
