In the first of a series of occasional articles on topical tax issues, Tom Donnelly, an independent, professional, tax adviser based in Castlebar, outlines the potential benefits of transferring a business to a company.
Lower tax rates
An individual trader will pay tax/PRSI/levies at rates up to 55 per cent, perhaps even higher after the next budget. Meanwhile, a company pays tax at just 12.5 per cent on its trading profits. Any salary paid out of the company will attract personal tax, etc, but no double taxation arises. Profits retained within the company, eg, for further investment in the business or elsewhere, can be built up more quickly, after paying just 12.5 per cent tax.
Pension planning
Secondly, a more favourable pension regime applies to companies. The tax deduction for individuals is limited to a percentage (15 per cent to 40 per cent depending on age ) of earnings, which are capped at €150,000 and there is a proposal for a single rate of tax relief of 33 per cent. Companies are not subject to similar restrictions and operating a company funded pension plan increases greatly the scope for creating a worthwhile director’s retirement fund.
Potential taxes on the transfer
The transfer to the company can give rise to a capital gains tax (CGT ) liability (currently at 25 per cent ) on the gain based on the value of the assets. Depending on how the transfer is structured a specific relief from CGT for a transfer of a business to a company may be availed of in exchange for shares in the company. Stamp duty may also arise but this can usually be overcome.
Other potential advantages include:
The transfer may provide an opportunity to extract funds from the business in a tax efficient manner. Asset protection/limited liability — valuable premises and/or machinery can be separated from the trade. A company is a more flexible vehicle for bringing in the next generation.
Conclusion
Nearly all types of business can operate through a company. Certain professions, eg, doctors, dentists, accountants, solicitors, and barristers are regulated in terms of how their business can be organised and conducted, but in many such instances it is possible to fully incorporate, for others partial incorporation may be the answer.
All businesses are different but all business owners should spend a little time considering if incorporating their business is the right move for them.
For a confidential discussion on this or any other taxation matter contact Tom Donnelly at 094 904 4786, email: [email protected]
No action should be taken on the basis of this article alone. You should obtain professional advice based on your specific circumstances.
