Have you been operating your business as a Sole trader or Partnership? Confused as to whether or not you should still be trading as such? Is it time to change to a Limited Company Structure? When, why and how should you do it?
From a tax saving point of view – the optimal time to convert from sole trader/partnership to a limited company is after the net profits of the business exceed the standard income tax cut-off rate i.e. €34,550 for a single person.
The above is just one of the reasons to operate as a company. Below is a summary of the advantages, opportunities, reliefs and obligations related to changing your business operations to a limited company structure.
Advantages of operating as Limited Company
Possibilty to avail of lower taxes i.e. corporation tax rate @12.5%
Sole traders and partnerships cannot avail of the 12.5% rate of tax. Directors and Shareholders of a limited company can extract funds from the company tax efficiently at the standard rate of income tax and have the option to leave the remaining funds in the company to be used or extracted at a later date.
Superior and more efficient pension options
Use a company pension scheme to reduce taxes and provide efficient benefits for directors/shareholders. This can be a lucrative long term benefit as it allows you to minimise taxes while contributing larger sums into a pension scheme.
Limited liability for directors/shareholders
Owner(s)’ liability is limited to the extent of the contributions to share capital (and personal guarantees). Any legal action taken will be against the company and not the individuals that manage or own the company.
Increases confidence in the business
Suppliers and Customers tend to have more faith in a business if it is a registered limited company as it is operating as a separate legal entity and is not dependant on one particular individual.
Protects company’s name
Registration of a limited company name will protect the name. The companies registration office will not allow companies to be formed with the same or very similar names. Therefore your new company name cannot be duplicated by another business.
Continuity of business
The company can continue to trade in the absence of one particular director or shareholder. A sole trader will generally cease to trade in the absence of the
More flexible borrowing powers
Possible to raise finance through issue of shares. Shares can be issued to investors under different conditions than normal borrowing from financial institutions. Investors generally feel that their money is more secure in a limited company structure.
Banks also prefer this for security reasons. They have option of extra security by registering a charge over the assets of the company – meaning the bank has first hold on all assets in the event of breach of loan terms.
Separate and distinct entity
The company is a separate entity, distinct from the individual(s) that own and manage the business.
Additional obligations when operating as a Limited Company
Forming the new company
To form the company an application is required to the Companies Registration Office (CRO). The name must be approved by the CRO and two directors and a company secretary are required to act as officers of the company. One of the directors can also be the company secretary. At least one director must be EEA resident. A company formation generally costs approximately €200 ex Vat.
Note: New Companies Act changes from 1 June 2015 will allow a company have a single director.
Register business name to company
If you want to attach a separate business name to your new company, a form RBN1 is required. The Companies Office filing fee is €20.
Register new company for relevant taxes
This can be done online through ROS. The process is free of charge and takes up to 2-5 working days for most taxes. VAT registration can take up to a few weeks due to Revenue Commissioners checks on the new company.
Prepare and file accounts and Companies Office returns
Accounts are required to be submitted annually to the Companies Registration Office (CRO) within 28 days of the Annual Return Date (ARD), which can be up to 9 months after the accounting year end. A from B1 is also required to be filed at the same time. This outlines the company’s details including details of directors and shareholders of the company.
Prepare and file corporation tax returns
An Annual Corporation tax return is due on or before 23rd day the 9th month after the accounting year end. This is generally prepared as part of the accounts for the year by your accountant and tax adviser.
Register as an employer (to pay owner’s salary)
As you are no longer a sole trader, you will generally be an employee of your new company. The company should register as an employer and complete payroll on behalf of the paid directors. P30 returns are required to be submitted to Revenue Commissioners. These returns can be monthly, quarterly or annually depending on levels of liabilities. The returns consist of the PAYE, PRSI and USC details for each employee.
Other issues when converting Sole Trader/Partnership business to Limited Company
In addition to the above the following processes should be followed to ease the changeover from sole trader to limited company
Open new bank account(s)
After forming the company, you will need to open a bank account in the name of the company. All income and payments should be made from this account. To open the account, you will need the certificate of incorporation as well as ID and proof of address of directors.
Change direct debits/standing orders to new bank
If you have any supplier payments or customers receipts set up to pay by standing order or direct debit, changes will be required. New bank details will be required by existing customers and suppliers will need to be informed of the company details in order to bill the new company for goods and services. This is crucial in the case of businesses claiming input VAT.
Invoices, headed paper and quotations etc. need to be updated to include details of new company and new tax registration number, if applicable (e.g. VAT number required on sales invoices)
Some of the disadvantages of limited companies
Administrative Burden > Costs
The main disadvantage is the additional costs associated with preparing annual accounts and company office returns due to the legal status of the entity. Generally, the annual certified accounts corporation tax returns and will cost is excess of €1,000 to prepare.
Directors Responsibilities > Offences
Directors of a company are required to act in the best interest of the company and to keep proper books and records of the company. Directors have duties to the company and can be prosecuted if the company is in breach of the regulations.
Privacy > Abridged Accounts
Accounts prepared must be submitted to the companies’ office and are available to view by any interested persons. Abridged accounts can be filed which will show the balance sheet figures – not the turnover, profit and loss details.
Bank Finance > Personal Guarantees
Although the company structure offers limited liability for directors and owners, generally, banks will require personal guarantees on borrowings of the company, thereby reducing the advantage of limited liability.
Reliefs Available for transfer of Business to a Limited Company
On transfer of business assets to a limited company there may be a capital gains tax (CGT) liability.
S600 TCA 1997 allows a relief from CGT on the basis that the assets are transferred in exchange for shares in the company.
The relief effectively defers the tax until such time as the shares in the company are subsequently sold. If the assets are disposed of exchange for cash or directors loan, then the proceeds become liable for CGT.
CGT Relief Conditions
- Business transferred from individual or partnership to a Limited Company
- Business must be transferred as a going concern – i.e continuing operations
- All assets (other than cash) must be transferred
- Assets must be transferred in exchange for shares in the company – If part in exchange for cash then there will be proportional CGT liability.
Retirement relief is allowed. The advantage is that you can sell the business assets to a limited company, retain ownership and withdraw the cash from the company tax free!
If you qualify for retirement relief, you can crystalize the relief now by converting to limited company. Conditions for retirement relief are outlined below:
- Individual is > 55 years of age
- Owns the business/assets for minimum of 10 years
Note: The period of ownership of the business prior to converting to limited company is allowable in terms of qualifying for retirement relief for capital gains purposes.
What can Liam Burns & Co do for you?
As a professional accountant and tax adviser, Liam Burns can assist you with the changeover from sole trader structure to limited company, in a hassle-free and tax efficient manner.
This will be provided as a FREE service for new and existing clients – where annual accounts and tax returns are or will be prepared by Liam Burns & Co.
Consultation fee is €295 ex VAT – This is deducted from the first annual fee for accounts preparation.