By Gerald Owens, 17th August 2010.
Why would someone opt to carry on business through a limited company rather than personally or via a partnership ?
The obvious attraction is the 12.5% rate of Corporation Tax on trading activities. But there are many more benefits which should be of interest to the entrepreneur. For example, the existence of limited liability means that one is not exposing all one’s personal assets if the business venture fails, or there is a claim made against it. This protection is lessened if there is evidence of fraudulent conduct by the Directors, or if the Directors or shareholders are required to give personal guarantees by Banks or other Creditors. A company is also a convenient vehicle to allocate interests in businesses to different family members and key employees. It is possible to recognise the contributions / interests of various categories of such shareholders by the creation of different classes of shares. Some classes may have all the voting rights, while others may be preference shares with a right to a fixed dividend.
With regard to Tax, the picture is unfortunately not as simple as a 12.5% tax rate. Some income, e.g. Rents and Interest, are usually liable at 25%. A surcharge of 20% applies in most cases to income such as Rents and Interest if it is not distributed by the company to its shareholders. If this income is paid out to the shareholders, they are taxed at personal rates which could be more than 50% when PRSI and the Income Levy are included. A surcharge of 7.5% applies to most service companies which do not distribute their profits to shareholders.
A company is still a very tax-efficient vehicle for an Irish trade where the promoters do not require to withdraw funds for personal use on a regular basis. An Irish holding company may also avail of exemptions from tax on gains of disposals of Irish or foreign subsidiaries. Some companies formed between 14 October 2008 and 31 December 2010 may be exempt from Corporation Tax if their liability for their first 3 years would have been € 40 000 or less. A proportion of the relief is available if the tax would have been between € 40 000 and € 60 000.
A company can be a very useful vehicle for raising capital for qualifying trades such as manufacturing, horticulture, shipping, music production and other activities. The Business Expansion Scheme ( BES ) provides investors with an opportunity of setting off their investments against their taxable income. This is subject to an annual limit of € 150 000, and also limits on the use of tax incentives by individuals whose income exceeds € 125,000 per annum. In this era of scarce bank credit, BES is also very attractive to an entrepreneur who wishes to start or expand an eligible trade. The scheme is due to cease on the 31st December 2013.
No company can afford to ignore the onerous regime of compliance with Company Law requirements. This involves the keeping of proper books, and the preparation of annual Accounts which may require an Auditor’s Report if the company satisfies certain conditions regarding size, or if it is late in filing its annual return to the Companies Registration Office (CRO). It also requires holding annual general meetings, keeping records of minutes of meetings, particulars of directors, shares issued etc in the Company Register. An annual return must be filed with the CRO. If it is late, heavy penalties may apply. In view of these onerous requirements, it is essential to employ professional advisers such as Accountants and Company Secretarial consultants who are familiar with the compliance regime, and who can largely remove this headache from the company itself.
In summary, a company can be a hugely beneficial vehicle, especially for a trading business. It may not be suitable for all people or all businesses, however. For this reason, proper professional advice is essential before taking the decision whether to conduct your business through a company.
Gerald Owens FCA, AITI is the Tax Manager of FDC TAX DEPARTMENT LTD. based in Cork. More information can be found on www.fdc.ie
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