I understand that the purpose of creating a business is to build personal wealth, but why do you advise taking the money out of the business as quickly as possible rather than allowing retained earnings to accumulate and eventually liquidating the company to benefit from capital gains rates? Assume the person has already fully utilised extracting value through pensions and has maximized that option.
Why Withdraw Business Profits Quickly
- Thread starter Mullsafin
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Brendan Burgess
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@Mullsafin
It's set out here
It's set out here
Key Post - Should I leave profits in the company and pay Corporation Tax?
The big mistake a lot of company owners make is the very simple statement "Corporation Tax is 12.5% while total taxes on income are 50%, so I will leave the profits in the company and pay less tax." The problem with this is that they will have to pay tax on the profits when they extract them...
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Thanks Brendan for that helpful post. I've had a read over it and was wondering what your take would be on the below example.
Suppose you own a business generating approximately €20 million in annual revenue and achieving around €1 million in post-tax profit. This profit calculation factors in paying yourself a €100,000 salary. The business holds substantial tangible assets valued at about €10 million, with an additional €3 million in cash on hand. Total assets amount to €20 million, balanced against liabilities of €6 million. The business employs around 40 people and has established systems and processes, making it potentially attractive to investors.
In this context, if you are considering expanding by acquiring additional buildings to grow the business, this could be an example where retaining profits within the company makes sense. Given the size, operational complexity, and asset base of the business, keeping funds inside allows for reinvestment and positions the company well for further growth or a future sale at CGT rates. Would this be an example of where keeping the money in the business makes sense?
Suppose you own a business generating approximately €20 million in annual revenue and achieving around €1 million in post-tax profit. This profit calculation factors in paying yourself a €100,000 salary. The business holds substantial tangible assets valued at about €10 million, with an additional €3 million in cash on hand. Total assets amount to €20 million, balanced against liabilities of €6 million. The business employs around 40 people and has established systems and processes, making it potentially attractive to investors.
In this context, if you are considering expanding by acquiring additional buildings to grow the business, this could be an example where retaining profits within the company makes sense. Given the size, operational complexity, and asset base of the business, keeping funds inside allows for reinvestment and positions the company well for further growth or a future sale at CGT rates. Would this be an example of where keeping the money in the business makes sense?
Brendan Burgess
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You should definitely pay for professional advice which I will come back to later.
But here are some initial thoughts.
If you are the sole shareholder of business with net assets of €14m, it is a very concentrated way to have all of your wealth - I am assuming you don't have €10m of personal wealth outside the business.
So it's not just a question solely of maximising the efficiency of the tax take from the business. Great businesses crash. I would definitely take out a big lump of cash and get it into my own name. So if anything happens the business, I am still wealthy. That might be through your pension or through salary.
It is always worth considering taking cash out and buying the premises for the business in your own name and renting them to the business. This is related to the first point. If anything goes wrong with the business, you still own the property in your own name. I am not saying that this is the right thing to do. I am saying you must compare and contrast the alternatives of buying it within the company and buying it personally.
The next consideration is what maximises the value of the business? Do potential buyers want to buy a business with €11m in operational assets and €3m cash? Or would they prefer to buy a business with €11m in operational assets? I simply don't know.
But here are some initial thoughts.
If you are the sole shareholder of business with net assets of €14m, it is a very concentrated way to have all of your wealth - I am assuming you don't have €10m of personal wealth outside the business.
So it's not just a question solely of maximising the efficiency of the tax take from the business. Great businesses crash. I would definitely take out a big lump of cash and get it into my own name. So if anything happens the business, I am still wealthy. That might be through your pension or through salary.
It is always worth considering taking cash out and buying the premises for the business in your own name and renting them to the business. This is related to the first point. If anything goes wrong with the business, you still own the property in your own name. I am not saying that this is the right thing to do. I am saying you must compare and contrast the alternatives of buying it within the company and buying it personally.
The next consideration is what maximises the value of the business? Do potential buyers want to buy a business with €11m in operational assets and €3m cash? Or would they prefer to buy a business with €11m in operational assets? I simply don't know.
Brendan Burgess
Founder
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Back to the professional advice.
You need to talk now to one of the Corporate Finance practices. They will give you integrated CF and tax advice.
They may tell you that it's better to have no cash in the business or that it does not matter.
They may tell you that it's better for the company to own the premises or for the company to be a tenant. For example, if the acquirer moves the operation to its own premises, it won't want to be stuck with your premises. If you own the premises personally, that would be fine.
But they will also guide you on the reliefs available - Retirement Relief and Enterprise Relief. Or would it make sense to gift the business or part of it to your children and they end up with about 10% CAT.
You need to talk now to one of the Corporate Finance practices. They will give you integrated CF and tax advice.
They may tell you that it's better to have no cash in the business or that it does not matter.
They may tell you that it's better for the company to own the premises or for the company to be a tenant. For example, if the acquirer moves the operation to its own premises, it won't want to be stuck with your premises. If you own the premises personally, that would be fine.
But they will also guide you on the reliefs available - Retirement Relief and Enterprise Relief. Or would it make sense to gift the business or part of it to your children and they end up with about 10% CAT.
Thanks Brendan, the company’s share capital is in a holding company controlled by the same shareholder.
I'm not sure whether Retirement/Enterprise Relief apply in this situation, but such reliefs would be very beneficial for gifting, as they could eliminate CGT on disposal and significantly reduce or remove gift and inheritance tax liabilities for children.
That's a good point about charging the company rent for the use of the premises.
Why might a buyer want or not want to acquire the cash held within the company they are buying?
I'm not sure whether Retirement/Enterprise Relief apply in this situation, but such reliefs would be very beneficial for gifting, as they could eliminate CGT on disposal and significantly reduce or remove gift and inheritance tax liabilities for children.
That's a good point about charging the company rent for the use of the premises.
Why might a buyer want or not want to acquire the cash held within the company they are buying?
Brendan Burgess
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Imagine a company with €10m of assets - but no borrowings and no cash. It makes €2m profit a year before tax.
Potential buyers look at this and value it a €X. They have to find €X to buy it.
Now imagine the same company with €3m of cash sitting in a bank account. That company is now worth € (X+3)M . So they have to find another €3m.
Or they might not need the €3m in the company and they have to figure out a way of getting it out tax efficiently. It seems like an unnecessary complication.
Or they might say that company is worth 10 times the €2m profits and ignore the assets. So the €3m doesn't help you.
My gut feeling is that you are better off without cash in the company. But I am looking at this from a somewhat theoretical point of view. A CF firm who has dealt with this issue many times, may tell you something else. That is why you should consult them now even if you have no immediate plans to sell the business.