The benefits of incorporating a Limited Company

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

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