Transferring your business to a company

Did you know that the marginal rate of income tax including PRSI and USC, is 55% (for earnings in excess of €100,000)? The rate of Corporation Tax on trading income is 12.5%, however, a higher rate of 25% applies to a company’s non-trading income.

At face value one would always think it would make sense to incorporate your business and trade as a company; tax rate differential of 55% compared to 12.5% for companies.

The following represents some of the main reasons why a business owner may decide to set-up a company:

  • To avail of the protection of Limited liability.
  • The business is growing and profits will be re-invested to allow for continued expansion.
  • Shareholder/ director salaries are a deduction against the profits of the company.
  • The company can make generous contributions to a company pension plan. These contributions are allowed as a deduction from profits.
  • It’s easier to involve family members in the business.
  • Business continuity (moving to next generation) can be more successful in a corporate structure.

Some other factors to be aware of are:

  • Accountant’s fees are normally higher.
  • Accounts, director and shareholder information must be filed with the Companies Registration Office (CRO) annually.
  • The public can have access to the information you have filed with the CRO.
  • Late filing penalties apply with the CRO.
  • The assets of the company i.e. profits, cash, can only be distributed to shareholders as a dividend. These payments would be subject to income tax, PRSI & USC for the shareholder.
  • There is some loss of control for the business owner. Company governance is subject to the provisions of the Companies Act 2014.
  • A family company can be liable to a 20% Close Company Surcharge where investment and rental income isn’t paid to shareholders as a dividend within 18 months of the end of the accounting period.
  • Ceasing to be a company is not as straightforward as is the case for a sole trader.

The main tax relief available to owners who transfer their business to a company relates to Capital Gains Tax (CGT). Any CGT chargeable on the transfer may be deferred until the shares in the company are sold. The amount of the CGT deferred is in proportion to the amount of consideration for the business which is taken as shares in the new company.

Becoming a company is a big step and requires careful consideration of many factors. Such as what are the principal’s plans are for the business, what are the expectations regarding salaries for directors, who is likely to inherit the business on retirement or death? What tax reliefs are available both now and into the future for the business owner? For example, incorporation of a farm enterprise may affect qualification for Agricultural Relief for a future successor; shares in a farm company are not agricultural property.

The Tax Man can help you navigate through the process of incorporation. 

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