As a general rule, if profits are low and are absorbed by personal day to day living expenses, it is usually more beneficial to remain as a sole trader or partnership rather than incorporate. This is particularly the case if you have, or are making trading losses which can then be offset against your spouse’s PAYE income at the higher 40% rate.
However, if your business is profitable, and you are not taking all the profits out of the business via salary, there may be significant advantages available by operating under a company structure.
These primary advantages relate to:
• Lower corporation tax rate of 12.5% on trading profits compared to individual tax rates of up to 40% plus PRSI/USC which can potentially raise the final tax figure to 55%.
• Access to tax efficient funding through the EIIS or SURE scheme which entitles an investor to 40% tax relief on their investment. This is not available to sole traders.
• For businesses with high borrowings, the lower corporation tax rates leaves more cash available in the company for either loan repayments or further investment in the business.
• Company directors and company employees can avail of civil service mileage and subsistence rates whereas self employed individuals must have fully receipted expenses for the actual expenses incurred.
• Pension flexibility/retirement funding; the ability to fund for one’s pension operating as a sole trader is extremely limited. Much more generous limits are available for proprietary directors of a company as in addition to personal contributions, your company can also contribute to your pension at no tax cost to you,
• Finally in relation to retirement age, self-employed can only retire from aged 60 onwards, whereas company directors (subject to certain restrictions) can retire at aged 50 and access their pension benefits.
Although there are advantages to incorporating and the ability to avail of certain reliefs for a business transfer to a company, some matters to watch out for include:
• The additional compliance costs of operating through a company including company secretarial costs and possibly audit fees.
• Close company tax rules which will most likely apply to your new company e.g. certain types of professional service companies e.g. consultants, auctioneers, doctors etc may be liable to an additional tax surcharge of up to 20% if they keep profits within the company.
• Consideration should also be given as to what assets will be transferred to the new company and what assets to keep in personal names, e.g. buildings.
• Pension planning particularly for individuals close to retirement with long service.
This article only gives a short roadmap of the taxation issues involved in deciding whether or not to incorporate your business. There is a lot more to this topic than introduced here. So, before you do anything, get competent legal and taxation assistance.
If you would like assistance with your tax affairs, please contact Coll & Co Chartered Accountants, Barna Galway. They can be contacted by phone: 091 592080 or by email: email@example.com. Coll & Co, specialise in Personal tax & Pensions advice.
Coll & Co, Chartered Accountants is regulated by their Institute ‘Chartered Accountants Ireland’ to provide Investment Advice.
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