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!

jhegarty

toga wrote:

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 it gets taxes again when you draw it down from business...its only an advantage if you want cash in the business for expansion...

toga

I see. How disappointing! What if I wanted to buy my own property, would it be an advantage for that? I wonder why the accountant recommended it....extra fees perhaps?

jimmycrackcorm

toga wrote:

I see. How disappointing! What if I wanted to buy my own property, would it be an advantage for that? I wonder why the accountant recommended it....extra fees perhaps?

You can buy a proerty and then rent it to your company who will be effectively paying the mortgage on it.

The 12.5% coroprate tax is what you pay when you take out your profits at the end of the year.

mckers

there really are a lot of pros and cons in forming a company. You are looking at a double tax charge; corporation tax and then income tax on any drawings. Ouch.

It really depends on what your plans are and how much cash you want for yourself. If you are thinkng of buying premises, there is a lot of thinking to be done, cashflow, tax planning etc. PM me if you want to discuss furhter.

REDZ

Big benefits for directors in terms of pensions, much better than for the average joe.

hmmm

The profits you "hold" in the company can be used to pay for various expenses that you may otherwise pay for yourself - but obviously if you pay personal expenses you will be taxed on income.

Ideally you would pay yourself the minimum salary you need to live on, and let the rest of your profits accumulate in the company (with caveats, best talk to your accountant). You can choose when to draw down the money as salary (if ever), or plough the money back into the company. There can be huge advantages, particularly if you make a lot more money than you need for day to day expenses.

e.g. Say you were making 100,000 a year in profits and your living expenses are 30k.

If you were a sole trader, you'd pay say 40k in income tax leaving you with 60k.
If a company, you'd pay CT @ 12.5% = 12,500 and income tax on the 30k you draw down (say 10k). You've paid 22.5k in tax and you can reinvest the balance in your business.

There are other advantages to a company, including limited liability (to an extent) and pension benefits as a director.