This is a common issue for?entrepreneurs, Should they operate as a sole trader or limited company. From a purely tax point of view if your company profit is larger than you need to live on a Ltd company is the likely to be the most tax?efficient?option.
The savings would work as follows,?
Profit for yr ?1.2M
Drawings required to live off ?200K (These will be taxed as income tax either option)
Remaining Profit ?1M
Taxed as a sole?trader
?506K income tax (approx)
Remaining Profit ?494k
Company option (again using ?1M remaining profit)
?1M @12.50 % = ?125k corporation tax due
Remaining Profit ?875k
BUT funds are stuck in the company?, final step is to ultimately liquidate the company?and pay CGT on the increase in your share holding
Current CGT Rate 25%?
So remaining funds of ?875k @ 25% = ?219K
Remaining Profit ?656K
Saving ?656k-?494k = ?162K
There is also better scope for sheltering pension contributions using a company?and you can get limited?liability.?
Disadvantages include increased compliance costs, Solicitors, Accountants ect.
This?technique?would be used as part of a long term tax plan and would in the real world is not that as simple as above as capital gains rates may change ect.
Voluntary liquidation comes with its own issues you may not be allowed operate as a director for a time afterwards all of which would have to be researched before embarking on this.
This blog post is from an Accountant based in Galway if you would like to discuss this further please do not hesitate to email
tax@domybooks.ie
Disclaimer: This blog post is my opinion and should not be treated as tax advice.
Interesting post Ralph.
A couple of thoughts/queries:
1. The company wouldn’t need to liquidate surely – a share dividend issue with attract the same rate of CGT? The same people (most likely) would benefit the same way. Dividends are a key part to investing/developing business and they should be factored in
2. If the company didn’t have debts – they could go for a members liquidation, with the blessing from Revenue, therefore not necessarily involving further costs or restrictions
A very difficult taxation issue for Sole traders -v- Directors is that Sole Traders pay tax on the profit at (or toward) the end of the year. So the tax is almost an additional source that needs to be found on top of the “profit” (or salary/drawings as it is commonly called). So if you made ?50k “profit” – you now need to find nearly as much to pay the tax on it; whereas a director’s salary is net – and is calculated.