Why Form a Company?

[toga]

I have started a business in the services sector about a year ago. It's doing well, has very low overheads (really only premises rental, which is quite cheap), thus most of my takings are profit which is taxable.

My accountant has said that I should form a company. He says that if I were to earn 130,000 Euro per annum gross, that I would pay myself 30,000 and be taxed normally on that and the rest would be taxed at 12.5%. This would leave me paying about 20,000 Euro tax as opposed to about 50,000 (all very rough figures!).

Where is the catch??? How do I access the profits, what do I do with them and are they taxed again before I get my stick paws on them? It all seems to be too good to be true that I simply walk away with the profits!

Apologies for my financial ignorance.

 

[hhhhhhhhhh]

I have started a business in the services sector about a year ago. It's doing well, has very low overheads (really only premises rental, which is quite cheap), thus most of my takings are profit which is taxable.

My accountant has said that I should form a company. He says that if I were to earn 130,000 Euro per annum gross, that I would pay myself 30,000 and be taxed normally on that and the rest would be taxed at 12.5%. This would leave me paying about 20,000 Euro tax as opposed to about 50,000 (all very rough figures!).

Where is the catch??? How do I access the profits, what do I do with them and are they taxed again before I get my stick paws on them? It all seems to be too good to be true that I simply walk away with the profits!

Apologies for my financial ignorance.

The catch is that the 100k that you leave in the company and pay corporation tax on, is the companies money, you will have to pay tax when you take the money out of the company.

 

[toga]

I see. Why then suggest forming a company,or is there another way to get the money out without paying tax?

 

[ubiquitous]

Your accountant should be best able to explain.

Some of the relevant issues are quite subtle and technical and as such in practical situations the entire "why form a company" question really needs to be addressed in a manner that takes into account your own specific circumstances and your plans for your business in the medium term. You will only confuse and possibly mislead yourself if you depend on piecemeal information in isolation to other factors.

Do not set up a company under any circumstances until and unless you have a good understanding of all the issues. If in doubt, stay as a sole trader until and unless it suits you to switch.

 

[rabbit]

Do not set up a company under any circumstances until and unless you have a good understanding of all the issues. If in doubt, stay as a sole trader until and unless it suits you to switch.

I agree 100%. In my experience , I know many people who set up companies and who would have to pay €€€€€€ to liquidate them, to access the money. The people who do best out of companies are accountants themselves, who charge high fees to look after / audit them etc.

 

[ubiquitous]

The people who do best out of companies are accountants themselves, who charge high fees to look after / audit them etc.

If you don't mind me saying so, that is a load of baloney. Something like 96% of Irish-registered companies are now audit-exempt so there is no need for audit fees. Also if you look on the www.cro.ie website (and the AAM archives) you will quickly see that there is usually no need for a liquidation to take place when closing down a company. Forming a company can generate big tax savings for many individuals and it is ludicrous to say that their accountants benefit most from this.

That said, forming a limited company is not for everyone and is a decision that one should not take lightly.

 

[rabbit]

there is usually no need for a liquidation to take place when closing down a company.

My understanding is that if a company has assets eg property, then for the company to be closed down for the directors to personally own the assets the company must be put in voluntary liquidation.

Forming a company can generate big tax savings for many individuals

It can also gererate big tax liabilities for many individuals eg in the example above Capital Gains Tax has to be paid by both the company and the individuals.

and it is ludicrous to say that their accountants benefit most from this.

I have found that the fees charged by accountants to be higher than the fees charged to sole traders ....but I have only a limited numbers of cases to base this opinion on. I know of one company director who was charged about four thousand euro alone just for advice on how to get rid of the limited company....a four or five page letter .... no wonder some accountants are so well off.

 

[ubiquitous]

My understanding is that if a company has assets eg property, then for the company to be closed down for the directors to personally own the assets the company must be put in voluntary liquidation.

The obvious advice here is that company directors should dispose of assets held within a company structure before they proceed to close down the company, if they want to avoid the formalities of voluntary liquidation. Sometimes this is a viable strategy, other times (generally where there is property owned by the company), voluntary liquidation may be more tax efficient. The vast majority of Irish private companies do not own property - generally on the basis of accountancy or tax advice. (see below)

It can also gererate big tax liabilities for many individuals eg in the example above Capital Gains Tax has to be paid by both the company and the individuals.

I have been pointing out for a number of years on AAM that:

- limited companies should not own investment property, except in unusual cases.
- people should not set up limited companies unless they are aware of the tax issues. (see above quote "Do not set up a company under any circumstances until and unless you have a good understanding of all the issues. If in doubt, stay as a sole trader until and unless it suits you to switch.")

Afaik, this is standard advice from accountants. As a result, very few companies own investment properties. You have hit on one of the key reasons for this advice. Dunno then if you can blame the accountant every time a "double tax hit" happens.

I have found that the fees charged by accountants to be higher than the fees charged to sole traders

Does this surprise you? Limited company accounts standards and formats must conform with the requirements of the Companies Acts. Also they must be filed annually with the CRO. There is no such requirement for sole trader accounts. For these reasons alone, their preparation will involve considerably more work and therefore will be more expensive.

I know of one company director who was charged about four thousand euro alone just for advice on how to get rid of the limited company....a four or five page letter .... no wonder some accountants are so well off.

Its a free market out there and consumers can choose expensive or better-value advisors depending on their preference. Just because one accountant charges four grand for advice doesnt mean that all do. Just because one car costs €200,000 doesn't mean that all do. Just because one house costs €10m doesnt mean that all do.

 

[ubiquitous]

Justin,

Please observe our posting guidelines - no advertising:

I might have a go- The leglislation will not be that different.

Are you sure? I would be interested in seeing if you can answer the following questions, as they apply to Irish companies.

Do you know what an ARD is?
Can you explain how the Corporation Tax "surcharge on certain undistributed income" works?
What is the standard wear & tear allowance for vehicles for capital allowances purposes?
What is the ODCE?
Explain the implications of failure to comply with section 31 of the 1990 Companies Act?
What are the implications of Section 40 (1) of the Companies (Amendment) Act, 1983?

Unless you know the answers to these questions, I would respectfully suggest that perhaps you should maybe stick to providing UK-centred advice, or maybe replenish your professional indemnity cover.