Sole Trader to Company?
For people who are self employed, and where profit from the business is significantly higher than personal drawings each year, it is advisable to review whether it is better to incorporate your business.
The benefits of using a company structure for your business are mainly lower profit taxes and limited liability. In this article I will only deal with the lower profit taxes.
Irelandís corporation tax rates remains at 12.5%, although this has received a lot of media coverage in recent years, with certain European countries raising the issue of Irelands low corporation tax rate. Current government policy is to keep this 12.5% corporation tax rate, and this has been re-iterated by Government on a number of occasions.
This corporation tax rate compares very favourably with current income tax rates for sole traders and partnerships on profits, where income tax of 20% or 40%, universal social charge at varying rates and PRSI combine to approximately 50% +- of income taxes on profits at the marginal rate where business profits exceed standard rate tax bands. The current corporation tax rate of 12.5% is not much higher than the combined USC and PRSI rates, before we even consider income tax of 20% or 40%. For this reason a lot of businesses are incorporating their business.
The process is not a complicated one. The sole trade or partnership must be ceased and cessation accounts prepared for the final year, and the business de-registered for all taxes. A revision of profits may arise in certain circumstances and this would need to be considered.
A new company can be set up relatively inexpensively, and normally 2 directors are appointed to the company board. The directors are responsible to ensure that the company complies with company law and other law, and can be held personally liable for the debts of the company in certain circumstances. The directors will open a new company bank account, register the company for corporation tax and employer taxes / vat if required, and register all employees as employees of the company. The company will be given a new tax number to be used on sales invoices and other documentation. The business will continue to trade as normal and the business name can be transferred to the company
After 6 months a B1 must be submitted to the Companies office. The directors are required to submit an annual B1 with accompanying company accounts to the Companies office by the annual return date that each company is assigned. Depending on the case, most business can file the company accounts without the need for an annual audit.
Normally the business person will become one of the new directors of the company, and must continue to file an income tax return to include their new company wage. The directors will be paid an agreed wage from the company. In addition the assets of the business can be transferred from the business person to the company at an agreed price.
Disclaimer: This is a general non technical summary of incorporating a business. You should always seek professional advice when tax planning, as different circumstances give rise to different issues to be addressed.