Sole Trader: can I invest my income before taxes hit me?

maschera

Hi all,

I'm setting up my own business but am still not sure whether to take the Sole Trader or LTD route.

I would go for the LTD because this will allow me to keep the money on my account that I could re-invest, and get a low tax rate.

In case I would be a Sole Trader, would I be hit by the income tax as it comes through? Or maybe once per year? In the second case, can I re-invest part of that money in the company and then avoid the income tax on that amount?

Hope I was clear enough!:rolleyes:

Thanks

Maschera

srsly78

As a sole trader if you spend money on gear (ie investing) then that's money you don't have as income. So no income tax on it.

With a LTD company you just don't pay out all your income as salary, leaving some money in company. You can get hit for corp tax on this company profit tho, and an additional service company charge if you fall under certain criteria. You really should look more closely at your "low tax rate" assumption.

maschera

Thanks srsly for the quick answer!

How often do they assess your income? E.g. I make $100 profit in February, and decide to spend $50 in a new PC in July. Will I be liable for 100-50=$50?

To make it easier, can I re-invest in the company the money that I earned during the year just before the date I will have to fill the Tax Return? I suppose they do a yearly assessment?

Mongarra

It is a difficult question as a Ltd. Co. involves not just tax implications but Companies Registration Office (CRO) requirements.

Small companies do not have to have an annnual audit done provided they have annual accounts prepared and submitted with the Annual Return to the CRO before the submission deadline, normally within 9 months of the accounting year end. However, if the deadline is missed then the audit exemption is lost for 2 years and this can be expensive as audited accounts will be more expensive to prepare than unaudited accounts and there are fines for missing the deadline.

On the tax front, a Ltd. company commencing business is relieved from Corporation Tax (CT) liability on its profits for the first 3 years where the liability would be €40,000 or less, with some relief if between €40,000 and €60,000. If €60,000 or over then the tax is payable. There are some excluded companies but generally the above applies.

A sole trader is liable from the start and, except for a complication in the first couple of years, the tax (including PRSI and Universal Social Charge - USC) is generally payable in one amount in October. I will not go into details about the complication but it has to do with the timing of
payments on account, called Preliminary Tax, for the first 2 years .

I do not quite understand what you mean by reinvesting money in the company. Any profits made and cash held as a consequence, belong to the company so it is not yours to play with. You can take out money from the company, the most common ways being by Directors remuneration or dividends, but it will be taxable in your hands. If you just leave the money in the company there are no tax implications for you but the obvious question then is what are you going to live on. You will probably have to withdraw money from the company as indicated and pay tax on it. Taking the money as a loan will not work either as there are tax implication there also.

Depending on your personal circumstances and other income (spouse?) then the sole trader route might be the best to start with and you can always form a Ltd. Co. at a later stage, although if a company takes over the trade after a period the 3-year relief for CT does not apply.

srsly78

maschera wrote: »

Thanks srsly for the quick answer!

How often do they assess your income? E.g. I make $100 profit in February, and decide to spend $50 in a new PC in July. Will I be liable for 100-50=$50?

To make it easier, can I re-invest in the company the money that I earned during the year just before the date I will have to fill the Tax Return? I suppose they do a yearly assessment?

Not exactly sure about sole traders (I operate as ltd), but I think they are self-assessed. So the onus is on you to keep your own books and make an annual return (first year return isnt due till year 2 etc).

maschera

Mongarra, very interesting about the corporation tax exemption. Thanks for bringing this up.

Does this mean that if I would be eligible to pay €40k in corporation tax (it should come from roughly 100k net profit or so), I would be completely exempted?

Will I need to pay this money back?

srsly78

There are specific criteria needed to avail of the startup company tax incentive. But yes you can be tax-free on a certain amount of profit for 3 years.

Mongarra

If you qualify for the reduction to "Nil" for CT then there is no payment due. It is not a deferral so it will not be payable later. The tax is calculated as it would be normally and then it is reduced to "Nil" if below the €40,000 limit - equivalent to €320,000 profits @ 12.5%.

smeharg

maschera wrote: »

...Does this mean that if I would be eligible to pay €40k in corporation tax (it should come from roughly 100k net profit or so), I would be completely exempted?

You are not completely exempted. You and the company are 2 separate legal entities. You are taxed and the company is taxed. The company can make a profit of €320k per year in each of the first 3 years without paying any corporation tax (subject to certain conditions being met).

You, on the other hand will be taxed on anything the company pays you at income tax rates plus PRSI and USC. Eg the company has income of 100k, it pays you 50k. You pay income tax, PRSI and USC on the 50k. The company is chargeable to corporation tax on the remaining 50k, but as the liability is less than €40k no corporation tax is due.

This is a very basic example and there is a lot more to consider than just this. You should really seek specific professional advice before making any decision.