If you are a sole trader or partnership you may be thinking about setting up a company for your business. Incorporating a company for your business has its benefits and it is not expensive to form a company, however there are many other issues to take into consideration when deciding whether to incorporate.
Advantages of incorporation:
12.50% corporate tax rate on company trading profits
Companies pay 12.50% tax on their trading profits held in the company. Sole traders and unlimited partnerships pay income tax, PRSI and USC of up to 52% on their profits. When profits of a company are extracted in the form of salary, bonus, distribution or dividend, these are taxed at a rate of up to 52% in the hands of the individual. Therefore if all the profits are taken out you do not benefit from the 12.50% corporation tax rate. Consider if your business has sufficient profits which can be left in the company and taxed at the lower corporate rate of 12.50%.
Limited liability protection
A company is a separate legal entity to its owner, directors and shareholders. Creditors can sue the company but not the individuals which own and manage the company. Any claims against the company are limited to the director/shareholder contributions to the share capital held in the company. Although it should be noted that any unlawful behaviour in the trading activities of the business, can result in the protection of the corporate veil being lifted and the directors/shareholders being potentially held liable.
Certainty and Security
A company can continue trading without reliance on any one individual whereas a sole trader generally depends on one person to continue trading. A company has legal responsibilities towards its creditors and cannot easily walk away from these obligations, which ultimately protects suppliers and customers. Banks and investors like to deal with a corporate as they have an added layer of security in the event of a default on their agreement. It is illegal for a company to trade if it is insolvent and cannot cover its debts. Incorporation also demonstrates a certain level of commitment to the permanency of the business.
A company can fund a pension for its employees/directors/shareholders tax efficiently and claim a deduction in its accounts for the expense, subject to limits. Whereas pension contribution limits for sole traders are more restrictive.
Foreign Exchange hedging – Brexit and US
A company can easily set up a presence in another country through a branch or a subsidiary off its main company. Having a physical trading presence in another country is one of the best ways to protect against fluctuations in foreign exchange rates by enabling the company to react quickly to changes and cash pool the foreign currency. In the event of having a downturn in sterling or US dollars, the business then has sufficient currency to trade cross border and also has a domestic presence in those markets from which to manage its trade and currency.
Protects Business Name
The Companies Registration Office will not allow the registration of the same company name twice. When you incorporate a company you are protecting your company name, which can be an asset in itself that you can later sell on. Some businesses trademark their company name and capitalise it as an intangible brand asset on the balance sheet, this can be franchised or sold on at a later date.
More availability of government grants and investment
Many government grants are only available to companies not sole trades. Banks will lend to companies more easily than private sole traders. Enterprise Ireland and the IDA provide many incentives to assist start up and growing businesses but you are often required to form a company.
Company directors can claim civil service subsistence rates on travel mileage and overnight accommodation in Ireland and abroad, which is tax free.
It is possible to incentivise employees by passing on or selling part of a company to them, using different shares or classes of shares. This cannot be done as a sole trader or partnership. A corporate structure can also facilitate inheritance planning, whereby shares in a company can be passed on tax free.
Corporate restructuring, mergers and acquisitions
Tax reliefs exist for the re-organising, restructuring and mergers of companies into new group structures. Company assets can be hived up or down and then out to new corporate structures with new or existing shareholders. Cross border merger relief allows corporates to takeover other companies in a tax efficient manner. Sole trades generally do not have this agility or access to such tax reliefs.
Groups and corporate structures
Companies can form groups to trade with each other domestically and cross border. Different types of company structures provide specific benefits, such as holding assets, sourcing finance, acting as agents or intermediaries, providing specific benefits to their shareholders.