A little help with "Sole Trader" vs. Business?

musicformedia

Hi guys,

I'm a little confused and acknowledge that I do need to discuss this with an actual accountant to ensure I don't screw things up.

I just wanted to confirm something, if anyone could help me? I compose in my spare time, and want to move to part time this year, then full time in 3-4 years.

Basically I registered myself for tax on my extra income and will be filling in a tax form this month for my earnings. I'm registered as a sole trader under a business name. At what point do I need to change to an actual business (is it from €60k upwards or something like that?) or can I continue to act as a sole trader under a business name and just file my tax returns each year?

I want to get a business account in January and want to just make sure I have all of the details of the business end of what I'll be doing

Thanks for any help

J.Ryan

You are a business, albeit, very small at the moment.

You can just file a tax return every year, but declare all income including PAYE.

If you want to PM me more details I can give a better answer

Cookie_Monster

You'll need to register for VAT once you pass a particular level, can't remember exactly what it is though.

You can stay a sole trader as long as you like. Its just more risky and less tax efficient the bigger you get. A company as a separate legal entity shields you somewhat from debts and legal action, and you may get additional tax reliefs for starting up.
There is more red tape and costs however.

musicformedia

Thanks very much for the information guys. Very much appreciated

elizaphilip

with sole trader, the tax on the business is lower

Cookie_Monster

elizaphilip wrote: »

with sole trader, the tax on the business is lower

41% vs 12.5%
how is that lower?

Cookie_Monster

OP: read this: http://www.citizensinformation.ie/en/employment/types_of_employment/self_employment/setting_up_a_business_in_ireland.html

and there is a revenue link with good info under the string of text: "IT48 Starting in Business (pdf)." on that page

J.Ryan

Cookie_Monster wrote: »

41% vs 12.5%
how is that lower?

The company pays tax on profits after the directors earnings, so if in year 2, the directors draw a salary that includes the year one retained earnings then it is being taxed twice, once at 12.5% and then the 87.5% being taken by the owner is taxed at 41% anyway.

People comment on the 12.5% tax all the time, but forget that for the owner of the company to get the funds they have to treat it as earnings (either by way of salary or by way of dividend) and pay tax on it anyway, it can be used as a planning tool to regulate income, but there is a level of knowledge required to do that, that isn't in the original post.

There is also the additional compliance costs of having a company, that people aren't aware off, CRO filings (amazing how many people forget), close company surcharges, personnal guarantees for the bank (which makes me question limited liability in many small companies), the fact that the company is a seperate legal entity which means that its funds are its own (and not belonging to the directors), the 10% on directors loans, the disclosure requirements regarding related parties.


Don't get me wrong, there are many circumstances where incorporation is a good move, but so many people get bar stool advice and then when a trained and qualified professional tells them that its wrong, they are ignored because it isn't what they want to hear.





Simple example with a company

Sales €10,000 no expenses is then €1,250 which is Cookie Monsters point, however the owner of the company has no income, so the tax paid is dead money (and I'm ignoring the issue of closed company surcharge)

Sales €10,000 Directors Salary €10,000 no other expenses, Director pay's tax at his/her marginal rate (including PRSI & Levies), no corporation tax.


Both examples ignore some of the compliances costs (assuming the director is competent enough to prepare audit exempt accounts and all relevant tax returns),
1) Filing fees with the CRO
2) Bank charges (the company would have an account in its own name to receive lodgements)
3) Transaction charges transfering money from company bank account to directors bank account
4) Time spent dealing with PAYE adminsitration with the company
5) Time spent preparing 2 year end tax returns (Corporation and Income Tax).


anyway rant over, sorry mods & (OP) for going off topic.

Cookie_Monster

Salaries are deductible for tax reasons, and hence the same as earnings taken in a sole trader. profits are taxed at 12.5% and DWT is 20% vs 41% for sole trader still to take "profits" out of the company.

Not to mention the 3 years of no CT for new startups (if the conditions are met of course.)

J.Ryan

The Person receiving the dividends pay's tax on them at their marginal rate, getting a credit for the DWT suffered, No tax saving there.

NumbrCrunchr

J.Ryan wrote: »

The company pays tax on profits after the directors earnings, so if in year 2, the directors draw a salary that includes the year one retained earnings then it is being taxed twice, once at 12.5% and then the 87.5% being taken by the owner is taxed at 41% anyway.

People comment on the 12.5% tax all the time, but forget that for the owner of the company to get the funds they have to treat it as earnings (either by way of salary or by way of dividend) and pay tax on it anyway, it can be used as a planning tool to regulate income, but there is a level of knowledge required to do that, that isn't in the original post.

Not sure I buy this argument. If a company has profits that are taxable it can always charge a salary to reduce it to nil. The salary will then be taxable at the Directors marginal rate - very same as a sole trader.
In a company however the Director can choose this strategy or it has the option to take the smaller corporation tax hit and leave the balance in the company to fund future growth or to build reserves - the sole trader does not have this option at all.

J.Ryan wrote: »

There is also the additional compliance costs of having a company, that people aren't aware off, CRO filings (amazing how many people forget), close company surcharges, personnal guarantees for the bank (which makes me question limited liability in many small companies), the fact that the company is a seperate legal entity which means that its funds are its own (and not belonging to the directors), the 10% on directors loans, the disclosure requirements regarding related parties.


Don't get me wrong, there are many circumstances where incorporation is a good move, but so many people get bar stool advice and then when a trained and qualified professional tells them that its wrong, they are ignored because it isn't what they want to hear.





Simple example with a company

Sales €10,000 no expenses is then €1,250 which is Cookie Monsters point, however the owner of the company has no income, so the tax paid is dead money (and I'm ignoring the issue of closed company surcharge)

Sales €10,000 Directors Salary €10,000 no other expenses, Director pay's tax at his/her marginal rate (including PRSI & Levies), no corporation tax.


Both examples ignore some of the compliances costs (assuming the director is competent enough to prepare audit exempt accounts and all relevant tax returns),
1) Filing fees with the CRO
2) Bank charges (the company would have an account in its own name to receive lodgements)
3) Transaction charges transfering money from company bank account to directors bank account
4) Time spent dealing with PAYE adminsitration with the company
5) Time spent preparing 2 year end tax returns (Corporation and Income Tax).


anyway rant over, sorry mods & (OP) for going off topic.

The compliance costs of a company are insignificant once you compare the savings that limited company directors can make on travel, entertainment and other expenses compared to sole traders.

Your example using figures of €10k are fair enough but once you develop some sort of scale, set-up costs and compliance costs become less significant.

Regards
Numbrcrunchr

nompere

NumbrCrunchr wrote: »

The compliance costs of a company are insignificant once you compare the savings that limited company directors can make on travel, entertainment and other expenses compared to sole traders.

Would you care to expand on this comment?

J.Ryan

NumbrCrunchr wrote: »

Not sure I buy this argument. If a company has profits that are taxable it can always charge a salary to reduce it to nil. The salary will then be taxable at the Directors marginal rate - very same as a sole trader.

Thus removing the argument that companies are best because of the low rate of CT.

NumbrCrunchr wrote: »

In a company however the Director can choose this strategy or it has the option to take the smaller corporation tax hit and leave the balance in the company to fund future growth or to build reserves - the sole trader does not have this option at all.

Agreed

NumbrCrunchr wrote: »

The compliance costs of a company are insignificant once you compare the savings that limited company directors can make on travel, entertainment and other expenses compared to sole traders.

Your example using figures of €10k are fair enough but once you develop some sort of scale, set-up costs and compliance costs become less significant.

Regards
Numbrcrunchr

Entertainment expenses are not allowable for tax purposes. Travel to and from your place of work is not allowable for tax purposes (regardless of being a sole trader or making an expenses claim). Sole traders and proprietary directors cannot claim subsistance either, as it is deemed that they control where they will be working. I've seen a private detective (working for insurance companies following people on personnal injuries claims) losing an appeal of a revenue audit disallowing subsistence expenses as he contolled where he worked.

dbran

Hi J Ryan

Normally subsistance and travel of company directors is allowed as a deduction and can be paid without any deduction of PAYE. But obviously the individual circumstances of the case will be a factor and will always need to be considered. I presume in the case of the private detective the revenue successfully argued that his normal place of business was actually in his car taking pictures and following people around. Therefore as all journeys were from home to "office" all expenses were disallowed.

Income Tax Statement of Practice SP - IT/2 / states thus

4.5 Company Directors
4.5.1 General
Company directors (including non-executive directors) are officers of the company (even where they own, or part own, the companies of which they are directors) and, as such, are subject to the same tax legislation, rules and conditions as employees as regards the tax treatment of the reimbursement of expenses of travel and subsistence.

Sole traders can also be reimbursed for their expenses, however they cannot use the civil service mileage rates. They can only use the vouched receipts method.

Kind Regards


dbran