At what point should I create a limited company - freelance software engineer.

[wannabesavvy]

Hello,

I am contemplating setting up a limited company to operate my freelance software engineering business. I'm aware that companies bring various costs that don't apply for sole traders. And also many benefits that also don't apply to sole traders.

My query is, at what point does it make sense to set up a limited company? The main criteria being length of time in business and turnover. I'm guessing a company only makes sense if you are going at it for at least 1 year.

In peoples experience, what is a ballpark figure for: Initial filings etc, annual returns, accountant audit/sign off.

Also, is it very complicated to wind down a company? Do I need to keep the same accountant all the time so he/she has intimate knowledge of it.

Are things more complicated if I have clients overseas?

Another point to note. Depending on the success of the company, one idea I had was that I could accumulate cash in the company, which I could use to pay for something like an MBA in a few years. Is it this simple? I am of the understanding that this isn't BIK and is employee training, not taxable.

Given a scenario where I could gross €80,500 for a 46 week. Would that suffice?

Thank you.

EDIT: Also, how much, ballpark would corporate banking fees be?

 

[Jim2007]

I think the first thing you'd do is define what you mean by freelance software engineering, is it your typical one person company with one client at a time or is it a real business running several projects at the same time and involving real business risk?

Furthermore what do you mean by clients overseas? are you body shopping? If so you need to understand that in come EU/EEA countries this type of service will require a local licence and bonding...

As a general rule, if the main purpose of this company is to avoid taxes, you'll probably find it is not going to fly very well.

In most cases, I say you are better of working through a shell company, especially when you start to look at pension costs, loss of income insurance and so on. These things are a lot more expensive if even available to a one many company.

In terms of social welfare and pension contributions it is usually much easer to obtain payment etc if you operate via shell company that a one man operation.

If you do intent to work abroad, at least in the EU/EEA, it is simpler to obtain the required permits as the employee of a large shell company that a one many company. In the latter case they will normally consider you to be self employed and require you to conform with the EU rules for establishing self employment there rather than issuing a simple employee permit.

 

[wannabesavvy]

Hi Jim,

Sorry for the misleading question. I made it sound like your typical tax avoidance scheme for IT Contractor.

I have been operating as a freelancer over the past few months and I have had three projects, all for different clients and running concurrently. One has just finished up, one is a high priority, taking most of my time and one is still ongoing but on the backburner with a little work being done, it will resume full scale in the new year.

So, I think that covers the freelancing part and that is how I would plan to operate in the new year. That said, I'm sure there will be times where I may only have one client and devote all resources to them. I may also spend some time on site, as most consultants/freelancers would.

I don't i'll be body shopping. I don't particularly want to employ anybody directly. If I need somebody to do work for me it would be on a contract basis.

By overseas clients I mean a non Irish company looking for me to supply services to them. I would work mainly in Ireland but would need the option to be able to work on site. For example, I currently have a contract with a South Pacific company.

Whats this about EU/EEA licensing? Surely I would be considered a free agent and can work anywhere within the EU? Obviously outside the EU, the usual work permit stuff would apply?

I also have ideas for a number of software solutions that I wish to provide as services.

There is also the consideration of liability should something go wrong.

And finally, yes, tax is definitely a consideration. I mean, it's about being tax efficient and not about avoidance. I do understand that at my level the net different regarding tax would probably be minimal.

It also a learning experience. But that's not the main reason, more of a by product. I'm sure there are much more hassle free and cheaper ways to learn stuff.

 

[TTI]

AIB Business banking is free for the first three years for startups.

 

[daigo75]

And finally, yes, tax is definitely a consideration. I mean, it's about being tax efficient and not about avoidance. I do understand that at my level the net different regarding tax would probably be minimal.

I'm not an accountant, and I may be mistaken, but my understanding is that, with an Ltd, taxation is higher, at the end. As a sole trader, you pay taxes and PRSI directly (i.e. 80k is what you pay your personal taxes on). With an Ltd, it should works as follows:
- Of the 80k, 12.5% goes to corporation tax.
- From what's left, another 10.5% is employer PRSI.
- The rest goes to you, and on it you pay the various taxes you have been paying so far.

 

[wannabesavvy]

I'm not an accountant, and I may be mistaken, but my understanding is that, with an Ltd, taxation is higher, at the end. As a sole trader, you pay taxes and PRSI directly (i.e. 80k is what you pay your personal taxes on). With an Ltd, it should works as follows:
- Of the 80k, 12.5% goes to corporation tax.
- From what's left, another 10.5% is employer PRSI.
- The rest goes to you, and on it you pay the various taxes you have been paying so far.

Yes, there's that too. I was aware of some level of double taxation.

Everybody says a company is a no brainer for what I do but i'm inclined to say you'd need to be turning at least €150k and have a genuine need for a company.

 

[yop]

I'm not an accountant, and I may be mistaken, but my understanding is that, with an Ltd, taxation is higher, at the end. As a sole trader, you pay taxes and PRSI directly (i.e. 80k is what you pay your personal taxes on). With an Ltd, it should works as follows:
- Of the 80k, 12.5% goes to corporation tax.
- From what's left, another 10.5% is employer PRSI.
- The rest goes to you, and on it you pay the various taxes you have been paying so far.

Interesting thread. So the OP is using 80k as an example. If we say that is the EX VAT figure.
And break that evenly (though that doesn't really happen as you will bill a different number of days per month), we will say 6600 per month to make it round!

So the OP is also an employee of his company and his bill for the month is 3000 euro gross.
Deductions are 780 euro and that is paid as part of the P30.
So thats the employee side of it.


So there is still 3600 in the banks.
You mention CT and Employer PRSI.

What value are they out of interest?

I'm in a similiar situation as the OP but not sure what value the CT and Employer PRSI is.
It might give the OP an idea also.