When should I change to a limited company?
In Ireland the cutoff for a single person is €35,300 and €44,300 for a married couple. Anything earned above these bands will be taxed at 40%. Before you even consider changing to a limited company, you should be earning in excess of these bands. All income from a sole trader will be taxed at 20-40%. A limited company is tax at 12.5%. This makes limited companies far more tax efficient for keeping funds within the company.
You should switch to a limited company if your earnings are in excess of your higher tax band. Also, if the salary you need from the company is less than the profits generated by the business. The benefit of having a limited company in this situation is the excess funds are taxed at 12.5% rather than 40% so you have greater funds available for reinvestment in future years.
How can I change to a limited company?
You can complete the process yourself but it is advisable you speak with an accountant to ensure everything is processed correctly. When you transfer the assets to the business you are effectively disposing of the assets. However, any capital gains tax is deferred through Transfer of Business Relief
(Section 600 Tax Consolidation Act 1997). There are a number of conditions to qualify for this relief:
- There must be a transfer of business assets from an individual to a company
- The business must be transferred as a going concern
- It must have business logic and not done to avoid taxes
- The transfer of asset must be partly or wholly for shares in the new company
- All of the business assets excluding cash, must be transferred
You will need to form a limited company, the most common is a private limited company by shares. You will need to file a cessation of the current business name being used by the sole trader and register the business name with the new company. When selecting your new company name make sure the name isn’t already in use.
An accountant can form a limited company for you. It can take 4 -8 working days. The cost is roughly €295. Once your limited company is formed you’ll need to pick an end date to cease trading as a sole trader. It’s also important to have a separate bank account for your new company. Finally make sure that you update revenue of your new situation.
What else should I be aware of?
There are a number of disadvantage of having a limited company that you should be aware of:
At a minimum you need two people for a limited company. You need an EEA director and a secretary. If you do not have an EEA director you need to have a non EEA director bond in place.