QUESTION: I run a small business that is starting to make substantial profits and I am considering incorporating my business. But with rising corporation tax rates I’m not sure if it is the right thing to do?
ANSWER: When considering transferring your business from a sole trade or partnership to a limited company, there are many factors that should be reviewed from a tax, legal and commercial perspective. Incorporation not only has to work for your business but it also has to work for you. This can depend on what size your business is and what are your long-term goals and aspirations.
A key difference between a limited company and an unincorporated business, is that a company is a separate legal entity. If you own an unincorporated business, there is no separation of identity. One of the big benefits of operating through a limited company is limited liability.
This can give protection to business owners compared to operating as sole-trader or a partnership, where you could be held liable for business debts and personal assets could be put at risk. Operating through a limited company can also help with the permanence of your business, make it more attractive to do business with and open up grant and funding opportunities.
A key driver for incorporation, can be lower tax rates applicable to companies (19 per cent and 25 per cent) compared to income tax rates for unincorporated businesses varying from 20 per cent to 45 per cent plus Class 4 and Class 2 NIC contributions.
A company pays corporation tax on its profits and when income is distributed to its shareholders, the extracted income, would also be subject to income tax.
Essentially this gives rise to double taxation on the same income. Whilst this could be seen as a disadvantage to incorporation, an incorporated business, can give business owners more flexibility on when and how income is extracted from the business. This can allow for more efficient tax planning for business owners during the lifetime of the business, succession planning or on the eventual sale of the business.
The costs associated with operating a limited company will be higher than operating an unincorporated business. The initial set up cost of forming a limited company may be minimal, however, there would be additional accounting and tax compliance costs, Company House filing fees and legal fees. Limited companies are also required to file accounts and, therefore, information on the trading performance of your business could become publicly available.
Prior to incorporation, planning is required and is essential as getting it wrong can be very costly. During the incorporation planning stage there are a number of factors that need to be considered which could have legal, commercial, accounting and tax implications.
Whilst a corporate structure could offer more security and be more tax efficient, incorporating a business should not be undertaken without adequate planning with your accountant or tax adviser.
:: Malachy McLernon (m.mclernon@fpmaab.com) is partner at FPM Accountants (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
