Prepare your exit strategy from limited companies

The tax benefits of limited companies for farms are well documented but in cases where there is no successor an orderly winding down is advisable, writes

MOST articles — and public meetings — on company formation over the past ten years have been about the advantages of incorporation.

I will put up my hands and plead guilty as being a strong advocate of company formation where the circumstances were favourable and readers will have read a number of my articles in this publication over the past few years highlighting the benefits of incorporation.

Following one such article I received a number of phone calls from farmers who wanted to know what the consequences would be of getting out of a company if their circumstances were such that the company was no longer relevant or beneficial.

Such questions need to be addressed thoroughly before committing to forming a company as the answers may well determine the farmer’s final decision.

The tax saving benefits in company formation are undoubtedly the big attraction but can these benefits be regarded as permanent savings or are they simply a deferral of tax that will become payable at a future date.

The answer may lie in the farmer’s circumstances in terms of how, when and if he intends to retire and whether or not he has a successor. I should stress that this article is strictly about exiting or winding down a company where there is no successor. I will deal with the subject matter by way of a theoretical case study (see right). Do

farming@independent.ie

The tax consequences of exiting or winding down a limited company will depend on the individual’s age, the value held in the company and how long the company has been trading for. All three factors will determine the extent if any of an impending tax problem.

EXIT COSTS

In the overall context companies in existence for more than five years and worth less than €1m will generally fare reasonably well in that the tax cost of exiting is not very penal. I should stress that this article is strictly about people who wish to exit a limited company with no successor to take over.

If you have a successor to pass on the company to, the position is entirely different and in broad terms the tax treatment is quite similar, if not more favourable in some instances, to situations where no company exists. I will deal with such cases in a future article.

Farmers considering incorporation or those who feel they rushed into company formation without adequately teasing out the long term issues as well as the short term ones should consult an expert who is known to have a thorough knowledge of both the taxation and farm regulation issues and who can allay any concerns you may have about the longer term.