Updated: Feb 12, 2021
Is it worth setting up as a limited company? What are the tax benefits? Is the paper work worth it? Paddy Delaney of Informed Decisions joined us recently to discuss this.
While there are a number of factors which one should consider before making a decision on which option to choose Paddy gave an outline of the pros and cons of each entity.
Limited Company – Broad Pros & Cons
A limited company means more reporting, setting up with the CRO, filing annual accounts and generally more paper work but it offers substantial benefits surrounding the liability and tax.
While a sole trader can be personally liable if a financial or insurance issue arises, a limited company's liability is limited to just that, that of the company.
A limited company can enable the business owner to structure their salary and profits in such a way that pension contributions are maximised, money is reinvested in the business, and that they pay themselves a smaller salary and thus less tax i.e corporation tax on the remaining balance.
While if the owner of a small sole trader business has a good year, they must pay the top level personal tax on all the profits, without the opportunity to reinvest money in the business in the same way and without the capacity to invest in their pension at the same level.
Sole Trader Pros and Cons
Paddy gave an overview of the different structures and benefits for a pension of a limited company versus a sole trader.
While as a sole trader you have to set up your own pension and can pay a maximum percentage based on your age, as a limited company owner the company can contribute before tax and you can also top up yourself.
= €1.86m Pension Pot
*At 60 assuming 5% net annual return (could be higher/lower)
He discussed how with the structure that a limited company allows for, someone with the same (and age, years in business, marital status) profit, could generate a pension of 1.86m with a limited company compared to 1.03m from a sole trader.
This is because the maximum contribution allowed for a personal pension on a salary of €115k, aged 45 is a 25% contribution (I've listed further age based limits below).
= €1.03m Pension Pot
At 60 assuming 5% net annual return (could be higher/lower)
While in the case of a pension established through a limited company there is an opportunity to contribute a much larger portion of the profits, i.e €67k of that 150k profit. This €67k is before corporation tax and you can top up further with your private contribution also.
You can also reinvest money that you retain in the company e.g property, funds or equities. There is also a potentially lower rate of taxation on investment income through the company of 25%, and the CGT on realised gains is 33% instead of 41%
In summary, while the additional reporting and form filling required is a drawback, the pros and cons outlined by Paddy seem to weigh heavily in the favour of a limited company structure if one has a company producing strong profits.
It allows for tax efficiencies, reduced exposure and the build up of a larger retirement income.
*Under 30yrs = 15% NRE (Net relevant earnings)
30-39 = 20% NRE
40-49 = 25%
50-54 = 30% NRE
55-59 = 35%
60+ = 40% NRE
**For broader process & nuances see CRO.ie & citizensinformation.ie
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As always please seek independent financial advice before making any investment decisions.
The above should not be considered recommendations.