This is a brief summary of the options. This paper should not be relied upon without taking specific advice from John Holohan & Co.
Advantages and Disadvantages of using a Limited Company structure for your new or existing business.
To Incorporate or not to Incorporate?
Corporation Tax=tax on profits of the company
PAYE/PRSI/USC=tax on director’s salary
Sole trade=running the business in an individual’s name as opposed to running the business through a limited company
Owner or partners in existing sole trade/partnership business or start-ups who start to trade using a limited company =”directors/shareholders”
Two Very Basic points re trading using a limited company for trading purposes;
FIRST BASIC POINT Even though you own the company you are still taxed like any other employee (almost!) who works for the company
If your company makes, say, €100,000 for the year and you take a salary of, say, €40,000 you are taxed on your salary as an employee of the company. The balance of the company profit is taxed at 12.5% i.e. €60,000*12.5% =€7,500. All other things being equal the balance left in the company is €60,000-€7,500=€52,500.
SECOND BASIC POINT If you want to get the balance of the profits after Corporation Tax out into your own hands you are taxed on the €52,500 (or any part of it you want to pay to yourself as additional salary) as further salary (or dividends) and this is subject to Income Tax, PRSI and USC which could be as high as 55%.
In general there are three scenarios re a trading company;
Scenario 1-Very Profitable
Trading as a Limited Company
Company taxable profit before Directors salary 100,000
Director’s salary (single person) 40,000
_______
Company Taxable profit after Director’s salary 60,000
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Corporation Tax on company taxable profit after Director’s salary @12.5% 7,500
Add PAYE/PRSI/USC on Director’s salary (single person) 10,000 _____
Total tax on your combined income 17,500 =====
Trading as a Sole Trader (i.e. no limited company structure)
Income Tax/PRSI/USC (single person) on taxable profit of €100,000 40,000
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Total tax saved 22,500
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Scenario 2-Breakeven Company
Trading as a Limited Company
Company taxable profit before Directors salary 40,000
Director’s salary (single person) 40,000
_______
Company Taxable profit after Director’s salary Nil
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Corporation Tax on company taxable profit after Director’s salary @12.5% Nil
Add PAYE/PRSI/USC on Director’s salary (single person) 10,000 _____
Total tax on your combined income 10,000
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Trading as a Sole Trader (i.e. no limited company structure)
Income Tax/PRSI/USC (single person) 10,000
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Total tax saved Nil
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No Tax saving; But Cashflow advantage of the company paying your tax bill each month (instead of the lump sum payment (in practice it is very difficult to have the lump sum) in the October/November of the following year) but watch out for the Tax payable in the October/November of the following year on rent received if you are renting land and/or buildings to the company.
Scenario 3 – Loss Making Company–
Limited Company; Company Trading taxable profit of €10,000 before director’s salary (of say €40,000) but after deducting the director’s salary (single person) there is a Corporation Tax loss of €30,000 so no Corporation tax payable by the company but there will still be €10,000 PAYE/PRSI/USC payable on the director’s salary.
Sole trader (i.e. not a limited company) if the business was operating as a sole trader there would be only minimal Income Tax/PRSI/IUSC (€500) tax payable by him/her.
In this scenario FROM A TAX POINT OF VIEW one will be sorry that one is operating the business as a limited company. It is not easy to switch between limited company structure and sole trade. However from a business point of view, if trading is bad, if losses continue and your company goes bust owing money you will be glad you have limited liability!
Disadvantages of using a limited company
Disclosure of Balance Sheet in Companies Office .For payment of a very small fee joe public can see your balance sheet.
In general you must file your financial statements in the Companies Office within 9 months of year end (28 days plus 28 days, soon to be maximum 56 days).
If you are late;
(a) You are fined €140 plus €3 for each up to a max of €1,240
and
- You have to have an audit carried out for the following two years accounts. This is costly in terms of auditor’s fees because even for a low activity company the fee would start from approximately €5,000 plus VAT (you can apply to the Circuit Court to avoid the audit – current cost approximately €1000.)
Taxable Benefit in Kind You are subject to PAYE, PRSI & USC (Benefit in kind) on any company assets used by you personally e.g car (unless it is an electric vehicle)
If you obtain a loan from the company the company has to pay 20% withholding tax to Revenue until such time as you have paid back the loan & there are strict Company Law limits as to how much the company can loan you (however you can use the Summary Approval Procedure) & you also pay Income Tax, PRSI & USC (Benefit in kind) on (current rate) 13.5% of the loan.
Accountants fees in general approximately 2-2.5 times the fee of a sole trade business-small audit exempt company approx. €3,000-€4,000 plus VAT plus fees for any additional services e.g. VAT returns, PAYE returns under the PAYE Modernisation scheme, tax advice etc.
If you have multiple directors and/or shareholders there might be Employer’s PRSI of 10.95% to be paid on top of your gross salary in the same way as this 10.95% is payable on an ordinary employee salary. You would not have this 10.95% additional cost as a sole trader.
Advantages
Limited Liability -provided you play by the rules if your company goes bang your personal assets, like your home, will be safe.
Company easily incorporated -cost €250 & takes about 5-8 working days
Depending on the size of your company Disclosure of your balance Sheet in Companies Office enables would be customers to see all is well (if it is!)
Corporation tax rate 12.5% on profits after Directors Salary (but beware further salary/dividends still taxable up to 55%).
More generous Pension rules in a limited company than in a sole trade
Company Pension; Depending on a number of factors including age, salary and length of service the company can pay 100% plus of the salary into a Revenue approved pension fund for the director AND the director is not taxable on this and pension funds are held in trust so if the company goes bust your pension funds in general are safe from the company’s creditors.
Sole trader; depending on age one can get tax relief on pension contributions from a range of 15% under age 30 to 40% age 60 and over of the sole trade relevant earnings.
Employment & Investment Incentive Scheme
Changes in the Finance Bill 2018 (came into law at the end of December 2018) under certain specific conditions ( & there are many!) have made it attractive again for family to invest in a qualifying company carrying on a qualifying new venture up to certain limits and get Income Tax relief on the investment.
Start-up Relief for Entrepreneurs (“SURE”)
There is a long list of conditions to be fulfilled but funds invested in the qualifying company carrying on a qualifying new venture by founder (s) can be used in certain circumstances to obtain a tax refund (s) for up to 7 tax years.
Exit strategy
Entrepreneur Rate 10%; In certain circumstances sale of the shares can be liable to a reduced rate of 10% Capital Gains Tax (instead of 33%)
Use of a holding company owning the trading company can mean in certain circumstances paying no Capital Gains Tax on disposal of the shares.
Sell Chargeable assets on open market; Subject to conditions in S.598 (age 55 or over,10 years or more trading, etc. etc.) sell on open market if aged less than 66 and if total proceeds re qualifying assets is less than €750,000 then no Capital Gains Tax payable on chargeable gains or if over €750,000 tapering relief is available.
Sell Chargeable assets on open market; Subject to conditions in S.598 (age 55 or over,10 years or more trading, etc. etc.) sell on open market if aged 66 or over and if total proceeds re qualifying assets is less than €500,000 then no Capital Gains Tax payable on chargeable gains or if over €500,000 tapering relief is available.
Gift to Children; Subject to conditions in S.598 & S.599 (age 55 or over,10 years or more trading, etc. etc.) gift to children and if the owner aged less than 66 then no Capital Gains Tax payable on any chargeable gains on qualifying assets. In these circumstances the children are exposed to Gift Tax. In addition to their tax free thresholds, this can be mitigated, where applicable, by 90% Relevant Property Business Relief, 90% Agricultural Relief and/or by using a combination of Company Law and tax market value rules one can have the value in the company flow into your childrens’ shares, if you wish to structure your company in that manner. There will be a Stamp duty to be paid.
Gift to Children; Subject to conditions in S.598 & S.599 (age 55 or over,10 years or more trading, etc. etc.) gift to children and if the owner aged 66 or over then no Capital Gains Tax payable on chargeable gains where total proceeds re qualifying assets is less than €3,000,001. In these circumstances the children are exposed to Gift Tax. In addition to their tax free thresholds this can be mitigated, where relevant, by 90% Relevant Property Business Relief, 90% Agricultural Relief and/or by using a combination of Company Law and tax market value rules one can have the value in the company flow into your childrens’ shares, if you wish to structure your company in that manner .There will be Stamp duty to be paid.
The ultimate exit strategy is death! There is no Capital Gains Tax on a death but there is an exposure to Inheritance Tax. In addition to their tax free thresholds, this can be mitigated by, where relevant, 90% Relevant Property Business Relief, 90% Agricultural Relief.
In certain circumstances a retiring director can be paid a tax free redundancy amount.
Every case is different. I will need to meet with you to discuss your specific requirements and assess after our discussion if the limited company structure is suitable for your new or existing business. For instance if you have other income it might, depending on circumstances, be better to trade in your own name at the start period of the business if you are of the opinion that the new business might incur losses, which could be offset against your other income at marginal rates as high as 55%. In the company structure you cannot use the limited company losses against your personal income.
John Holohan FCCA, Chartered Tax Adviser (CTA).
info@johnholohanandco.ie