Company type and taxation

00bri

Hi all,

I'll be starting a new business within the next few months and am wondering if there are any advice/opinions on the decision of company type due to taxation.

Because I am already working full time in a permanent position (well it's permanent for now but the way things are going who knows?) the business will start off on a part time basis. My work hours are very flexible so it shouldn't be a problem. Eventually I plan on taking it full time and diversifying into other products/services within the same market.

I will be financing the business myself. To start off part time I estimate I'll need to invest about 5,000 euro. To go full time I'd estimate at that point I'll need another 20,000 euro.

What I would like to do is not pay myself any wage or keep any money from the business in part time mode and keep it within the business with the plan of going full time. The problem with this (please correct me if I'm wrong) is that if I'm trading as a sole trader I will be taxed on the profits of the business - even if I don't take it as payment but keep it within the business. I don't want to screw with the tax credits of my current job so will be taxed at the current rates on all of the part time business. When that hits the 41%, which wouldn't be long, along with the levy it wouldn't even be worth doing the business part time.

I believe my other option is to set up a limited company. By having a limited company I will only be paying 12.5% on the profit compared to the 41% as a sole trader. Because I will not be taking a salary the 87.5% of the profit will go back into the business. Two issues I see though... First, I'll need to have someone else as a director and I'd feel uncomfortable giving that power to someone who does nothing for the business. Secondly, when I go full time I'll be paying the 12.5% on the profit and then the standard rates on my salary, meaning I'll be paying even more tax than if I was a sole trader.

Does anyone know if it's possible/feasible to set up as a limited company while part time, then when about to go full time pull the money from the business, wind it up, then use the money to set up as a sole trader? When winding up the limited company and pulling the money out would I be liable for income tax on that money?

Any thoughts, suggestions, opinions, advice welcome.

Thanks.

brianefox

Hi
any good accountant or tax consultant will sort you out in one consultation
brianefox

DoMyBooks

Firstly having another individual as a director doesn't have to be a very big issue. You can have a single member company with just one shareholder giving you the power to remove the other director. Write up a basic directors agreement confirming you can ask them to resign at any time for any reason and they must do it. Both of you sign this. Often people use their spouse or parent as a second director. If you set up your company with a decent formations agent they can assist you with this.

Winding a company up is a tax efficient way of releasing the funds. If you wind up a company you will pay 25% CGT on the funds you release as opposed to higher income tax rate. The caveat of this is you wouldn't want to liquidate and start up again as this could be seen as tax evasion.

Two other things to bear in mind are with a Ltd company you can claim valid business related expenses at the civil service rates http://www.finance.gov.ie/viewdoc.asp?DocID=5703 These can be significant if you do a lot of business travel but on the downside the accountancy and compliance costs of a Ltd company are larger than a sole trader.

The comment above is not professional advice just my personal opinion. I would suggest getting professional advice particularly before setting up a Ltd company.

I have a blog post on the above here:
http://domybooks.ie/Blog/?p=137

Best of Luck with the business.

00bri

Thank you DoMyBooks, very helpful.