Posted on Mon, Feb 20, 2012
Should you operate your business through a Company?
There has always being the question of whether a business should trade as a sole trader/partnership or through a company vehicle. This decision has become more relevant with the introduction of the 12.5% rate of corporation tax.
The 12.5% corporation tax rate should not be the be all and end all in the decision as there are many factors to be considered before an informed decision can be made.
We have included the more significant points below as “food for thought” rather than an attempt at the definitive answer. The precise answer will depend on your type of business as well as the fact that perhaps your business may not be permitted by your professional body to trade through a company.
Advantages and Disadvantages of Incorporation
The main advantages of having a business carried on by a company are as follows:
a) Limited Liability
Should you decide to incorporate, you will then be granted the benefit of limited liability within a company. A limited liability company may be formed which limits the liability of you as the members to the amount unpaid on the shares which you own in the company or alternatively limits liability by an amount which you guarantee will pay in the event that the company is wound up or goes into liquidation. In today’s litigious world, this is something worth considering.
b) Retention of Profits for future investment in the business
If you incorporate, the company should pay Corporation Tax on any profits earned in a particular year.
The transfer of business to a company will save money if the drawings are significantly less than the company's profits - in other words, if the profits are allowed to build up in the company. As a result, there is more scope for a company to invest the business for the future.
c) Pension Planning
As self-employed individuals, the maximum pension contribution that is allowed for tax purposes is between 15% and 40% of annual earnings depending on age. In addition there is also an overall earnings cap of €115,000 However, a corporate entity can establish a pension fund for its directors and the level of contribution allowed for tax purposes are much more generous.
d) Start up relief for certain companies
A company which is starting a new business may be exempt from paying corporation tax for the first three years provided certain conditions are complied with.
e) Tax credit for Research and Development
This is a very generous relief which only applies to companies and not to sole traders or partnerships.
f) Greater scope for funding
There can be more scope for funding through a company structure, for example you can get investors to invest in your business under the employment and Investment Incentive scheme and there is greater access to grants from Government Departments.
The main disadvantages of having a business carried on by a company are as follows:
a) Close Company issues
“Close companies” (e.g. the typical Irish family company) have certain tax penalties/restrictions imposed on them.
b) Capital Gains Tax
If a property is transferred into a company, there will be a potential exposure to a double capital gains tax charge on the property – the first in the hands of the company and the second in the hands of the shareholders in the event that the property is sold and the shareholders wish to access the proceeds personally.
c) Acceleration of Tax Payments
Drawings by you all from the company would be subject to PAYE as emoluments. This PAYE is payable by the company as employer on a monthly basis. There is therefore a cash flow cost with tax payments on your drawings being accelerated, compared with your current position as self-employed persons.
d) Cost of incorporation and annual audit and filing fees
There are normally extra costs when you have a company and there is also the time and cost of taking minutes of directors meetings and loss of confidentiality. Company accounts must be filed with the Companies Office where they can be inspected by anyone. Small companies need only file an abridged balance sheet. The obligation to file accounts can be avoided if the company has unlimited liability.
Summary
There is a mixed bag of advantages and disadvantages for setting up a company and you must decide if a company structure is the correct vehicle for your business.
If you have any queries, please feel free to contact our office.
Posted on Mon, Jan 16, 2012
Business Finance
In the past few months we have been successful in negotiating new loan facilities in quite a number of cases, varying from a Hostel business to a Food Processing expansion, a Leisure Business, and a School extension. All of these would have included a property purchase. Finance is therefore most definitely available for the right projects. The key components in a successful application will be:
- Established cash flow from the business.
- Strong and experienced management.
- Equity contribution from promoters of at least 25%.
- Adequate security.
Bank Arrears.
All banks have at this stage split out any loans on interest only or in arrears into a separate division. To our knowledge, except for possibly Bank of Scotland, none of the banks have yet reached the stage of negotiating “debt forgiveness” or “debt write off” except in the case of a liquidation or bankruptcy. Therefore it is vital to continue to effectively manage the relationship with the bank until such time as a practical resolution evolves. To manage this ongoing relationship we have found you need:
- To be totally open, as trust is paramount in a banking relationship.
- To be non threatening.
- To avoid bringing up the concept of debt write off at this stage.
- To ensure that trophy assets have been disposed of.
- To have up to date management accounts and financial information available
- Your tax affairs to be up to date.
- The major focus of management to be on the key issue or the problem.