Important factors to consider about incorporating your business

I currently run my own business and despite the tough times faced by us all, thankfully it has remained profitable. As a result of this, I have recently thought about incorporating my business and now hope you can advise me on some of the important factors I need to consider?

Firstly I would like to congratulate you on the success of your business and wish you continued success in the future. There is unquestionably, some real incentives for someone in your position to now incorporate your business. However there are also some pitfalls which will have to be fully considered before any final decision is made.

Many would argue the greatest benefit of incorporation is the limited liability status it provides. As a result of incorporation a corporate veil exists between the individual shareholder and the company and with limited liability status a company shareholder will only be liable to lose the share capital they subscribe to. This is in stark contrast to a sole trader, who is personally liable to all debts of the business. Of course in the current economic climate the strength of limited liability status may be weakened, if banks and creditors insist on personal guarantees in respect of any debts incurred.

Another important consideration is the potential tax benefit of incorporation. The current corporation tax rate in Ireland, is much publicised, as one of the lowest rates in Europe at 12.5%. This compares very favourably to the current marginal income tax rate to which sole traders are subject to, especially when PRSI and USC are included. Obviously the advantage of having your business’s profits taxed at the lower corporation tax rate are clear, however it is important to note, that a close company surcharge on undistributed income may also apply in certain circumstances. Crucially, Income Tax will still apply to any salary, dividends etc. taken from the company. While business losses cannot be set against personal income for tax purposes following incorporation.

The increasingly flexible options available with pension funds, combined with the tax savings available on contributions made to pension plans, makes them worth considering as part of any incorporation decision. This is because the additional corporate contributions available to Company Directors can be very significant, dependent of the level of salary earned by the director, period of service, shareholding etc. This is a significant advantage to incorporation and one which should be discussed in detailed with a qualified financial advisor with regards to your own personal circumstances.

Looking ahead, it may also be easier to dispose of all or part of the business, as a legal entity. This is because a company exists independent of any one person and there can be many owners. This also allows for increased tax planning opportunities in terms of passing on the business to the next generation.

While incorporation has some clear benefits, there are also some other factors which require consideration before any decision is made. Setting up a company is more expensive than trading as a sole trader. Legislative requirements may be costly and time consuming as a result of the need to prepare and file accounts with the Companies Registration Office. Importantly, these accounts are then available for inspection by the public. Company directors are also subject to extensive legal responsibilities and may be prosecuted if they fail to meet these. Also, it will be important to confirm if the stakeholders in your business are agreeable to the proposed incorporation. If banks are unwilling to transfer bank loans, overdraft facilities etc to the newly incorporated company then incorporation may not be feasible at this time.

Consideration would also have to be given, to any potential taxes which may arise as a result of the transfer of your business to a company. Capital Gains Tax, Stamp Duty, VAT and Income Tax may arise as a result of the proposed transfer. However with careful tax planning it may be possible to minimise these costs. For this reason, I would advise that you discuss any proposed transfer with a qualified tax professional before implementation.

In conclusion, there are significant benefits to incorporating your business. Indeed it is often advisable to for small business to incorporate if trading profits are greater than the individual’s requirements, to avail of the beneficial corporation tax rate, increased financial planning and limited liability status.

If you have any queries on incorporation, please contact George Skelton on 053 9170507 or email gskelton@rda.ie