Benefits of running a one man business as a Limited Company from a tax perspective?

dgallagher_73

I'm trying to wrap my head around the benefits of setting up a LTD company VS being a sole proprietorship. My basic understanding is that in a Limited Company your business is considered a separate legal entity and your business assets are protected etc. Also in some cases the business's net profits would be taxed a lot less than if it was not limited.
However I'm wondering would there be any benefit at all for a person who operates a business on their own to make it a limited company as opposed to a sole proprietorship?


Okay so lets take two examples of an online software business that is owned and run by one person that earned 100,000 Euros in profit for the year 2020.
The first example would be in the case that the business is a sole proprietorship and the second example would be in the case where the business is a limited company.


In the sole proprietorship example, the business owner's net income after being taxed on that 100 grand would be 61,353 Euros for the year of 2020 based on the Deloitte income tax calculator that is found here: http://services.deloitte.ie/Results.aspx

In the case where the business was a limited company they would be charge a 12.5% corporation tax on that 100,000 Euros profit. So 12,500 Euros would go to Revenue and the remaining 87,500 Euros would go into the companies bank account.

However if the business owner wants to pay themselves the entire profit of 2020 for themselves by transferring that 87,500 Euros from the company's account into their personal account they would be taxed in the exact same way that a sole proprietor would be upon receiving 87,500 Euros? So after being taxed on that 87,500 Euros they would end up with a net annual income of 55,354 Euros according to the Deloitte income tax calculator: http://services.deloitte.ie/Results.aspx

So not only has the business paid 12,500 in corporation tax but when the business owner wants to pay themselves the entirety of the money earned after paying corporation tax (87,500) they now have to pay normal income tax on that 87.5 grand leaving them with 55,354 Euros.

Am I wrong or would it make way more sense to be a sole proprietor in this scenario?

Stratvs

The business owner, when working for the company is taxed through PAYE as an employee and the salary is then a deduction for ct purposes. So if profit before owner wages is 100k and the owner takes a taxed salary during the year of 100k then there is no profit for ct purposes so no ct. if profit before salary is 100k and salary is 90k then ct is on 10k and PAYE is operated on the 90k.

dgallagher_73

Stratvs wrote: »

The business owner, when working for the company is taxed through PAYE as an employee and the salary is then a deduction for ct purposes. So if profit before owner wages is 100k and the owner takes a taxed salary during the year of 100k then there is no profit for ct purposes so no ct. if profit before salary is 100k and salary is 90k then ct is on 10k and PAYE is operated on the 90k.

Thanks for the reply.

I assume PAYE is calculated the same way that income tax is? So I can still use the Deloitte Income Tax calculator to calculate my net yearly income?

So you're saying that as I'm the business owner of the limited company I can give myself a salary of 100 grand which I chose to give myself after my business had earned 100K for the year of 2020. Because I have taken every penny in the company's bank account to give myself 100K that means that the business is not liable for corporation tax?

Stratvs

dgallagher_73 wrote: »

Thanks for the reply.

I assume PAYE is calculated the same way that income tax is? So I can still use the Deloitte Income Tax calculator to calculate my net yearly income?

So you're saying that as I'm the business owner of the limited company I can give myself a salary of 100 grand which I chose to give myself after my business had earned 100K for the year of 2020. Because I have taken every penny in the company's bank account to give myself 100K that means that the business is not liable for corporation tax?

PAYE operated as normal although PRSI if you’re a proprietary director is class S not A. Payroll filed weekly/monthly as the year progresses via your payroll software on ROS and PAYE/USC/PRSI paid by variable direct debit monthly.

Say P&L then at year end is as follows :-

Sales 200,000
Cost of sales 50,000 ( goods purchased for resale )
Gross profit 150,000
Other Expenses 50,000 ( light heat, rent, insurance etc. )
Directors Remuneration 100,000
Net Profit 0

CT will be nil ( assuming all expenses allowable )

The directors remuneration of 100,000 would end up as (say) 40,000 remitted to revenue by the company in PAYE/PRSI/USC and 60,000 net paid to the director.

Ultimately if the director intends to take all profit out then they will pay their normal PAYE/PRSI/USC on that. If profit still exceeds remuneration then the excess will be chargeable to relevant CT rates. There may be pension contributions that the company can decide to pay for the director in addition to salary and that would also be deductible for CT.

Green Mile

I’d recommend you run a monthly payroll and pay yourself the net pay each month and submit the taxes to revenue. Each month revenue will see what tax you paid in real time and will receive payment meaning you won’t be hit with a big tax bill at the end of the year. You can give yourself top-ups or a bonus at year end of whatever you want to take out of the company. You can flush through non tax revenue approved expenses via payroll too.

In addition, you can pay into a pension to reduce your tax bill, all at source within payroll.