There are a number of differences between operating a business as a sole trader or through a company. We can advise which structure best suits your business.
- A sole trader owns the business personally and is personally liable for the debts of the business.
- A private limited company is a separate legal person and the shareholders of the company are generally only liable for the debts of the company to the extent of the share capital contributed to the company. This is what is meant by “limited liability”. In practice though it is not unusual for financial institutions to look for personal guarantees for company borrowings from the shareholders, especially in the start-up years.
Key Elements to Consider
A shareholder is only liable for the debts of a company to the extent of his/her share capital. Therefore if the company is unable to meet its debts, the creditors of the company do no have access to the personal assets of the shareholders.
The corporation tax rates (12.5%) are likely to be considerably lower than those for individuals for the foreseeable future. The lower tax rates will mean that there will be more cash available within a company to reinvest into the business than if the business had been carried on as a sole trade or through a partnership.
Pension funding is far more flexible through a company scheme particularly for directors in their 40’s and 50’s. The use of a company gives rise to the opportunity to set up an employer sponsored pension scheme rather than a self-employed pension scheme. A spouse and other family members may also be employed by the company, paid a reasonable salary and also included in the pension scheme.
Extracting profits to shareholders and directors
The extraction of profits from a company to shareholders and directors is a complex area with many tax consequences.
Some of the more popular methods include;
- Directors remuneration or bonuses
- Salaries to family members
- Pension contributions
- Interest on loans to the company
- Renting personally owned property to the company for business use
- Company buy-back of shares
- Company liquidation and distribution of assets
Sale of business
A successful business that has been established under the umbrella of a company is easier to distance from individual shareholders than from individuals. For this reason it is easier to sell on a business managed through a company as the business is recognised as belonging in many cases (though not all) to the company rather than to the shareholders.
Set-up and administration costs
There are costs involved in setting up and administering a company on an annual basis. A company must produce audited accounts and these must be filed with the Companies Office and the Inspector of Taxes. A sole trader need only produce accounts for tax purposes.
A company is a separate legal person quite distinct from its shareholders and directors. The are restrictions imposed by the Companies Acts on, for example, the making of loans to directors and a company providing financial assistance towards the purchase of its own shares.
The majority of family companies in Ireland are regarded as “Close Companies” for tax purposes. There are four main consequences of close company status;
- certain benefits-in-kind and expense payments to shareholders/directors and others associated with the company are treated as distributions (dividends)
- interest in excess of certain rates paid to directors or their associates treated as distributions
- loans to shareholders/directors are penalised and treated as income in the hands of the recipients if written off or forgiven
- a surcharge of 20% on investment income and rental income of the company which is not distributed within eighteen months of the end of the accounting period in which it is received.
Assets held within the company
Assets, in particular properties, which are purchased within a company rather than in an individual’s own name will attract a double charge to tax on disposal if the proceeds are to be extracted into the shareholders hands. The first charge is on the disposal of the property by the company which will be subject to capital gains tax. The second tax charge is triggered when/if the net proceeds of sale are extracted from the company by way of salary or dividend or perhaps on liquidation of the company.
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