How to decide on the corporate structure of your own business
Q. I have recently thought about transferring my business to a limited company. Do you believe this to be a good idea?
A. Whether or not a limited company structure is appropriate to your business will depend on a number of factors. It is now vitally important that you consider all the potential implications of any incorporation decision. Perhaps, the greatest benefit of incorporation is the limited liability status it provides. Incorporation introduces a corporate veil between the individual shareholder and the company. This means shareholders of limited companies are only liable to lose the share capital they subscribe to. In contrast a sole trader is personally liable for debts of the business.
There are also clear tax benefits of incorporation. The current corporation tax rate in Ireland is much publicised at 12.5%. This compares very favourably to the current marginal income tax rate to which sole traders are subject to, which when PRSI and USC is included can be as high as 55%. Obviously the advantage of having your business’s profits taxed at the lower corporation tax rate are clear, however it is important to note, that a close company surcharge on undistributed income may also apply in certain circumstances. Crucially, income tax will still apply to any salary, dividends etc. taken from the company. While business losses cannot be set against personal income for tax purposes following incorporation.
The tax efficient pension contributions available to Company Directors also require consideration. These can be very significant, dependent on the level of salary earned by the director, period of service, shareholding etc. This is a significant advantage to incorporation and one which should be discussed in detail with a qualified financial advisor with regards to your own personal circumstances.
With one eye to the future, it may also be easier to dispose of all or part of the business, as a legal entity. This is because a company exists independent of any one person and there can be many owners. This also allows for increased tax planning opportunities in terms of passing on the business to the next generation.
While the above are obvious benefits of incorporation, there are also some other factors which require considera- tion before any decision is made. Setting up a company is more expensive than trading as a sole trader. Legislative requirements may be costly and time consuming as a result of the need to prepare and file accounts with the Companies Registration Office. Importantly, these accounts are then available for inspection by the public. Company directors are also subject to extensive legal responsibilities and may be prosecuted if they fail to meet these.
Consideration should also be given, to any potential taxes which may arise as a result of the transfer of your business to a company. Capital Gains Tax, Stamp Duty, VAT and Income Tax may arise as a result of the proposed transfer. However with careful tax planning it may be possible to minimise these costs or indeed take advantage of potential tax planning opportunities.
If you have any further queries in relation to the tax implications of incorporation, please do not hesitate to contact RDA Accountants’ Tax manager George Skelton CTA, ACA, at our Wexford office for further assistance.