Going Limited and its Advantages

Business owners are often unsure about how they should trade, whether as a sole trader, partnership or limited company.

Regardless of size, ownership structure or industry, generally speaking there is no legal obligation to trade using a particular entity. There are however very marked differences between the various options so it is important that the topic is given appropriate consideration. In this article, we review the advantages and disadvantages of trading via a limited company.

The Advantages of Incorporation

Limited Liability

First and foremost, the principal benefit of trading as a company has always been the limited liability bestowed upon the company's shareholders. Directors or shareholders personal assets are not at risk in the event of a winding up or receivership.

Status

Seeing ‘limited’ at the end of a business’ name gives the business some prestige and gives an illusion that the business is large. In certain industries this can be particularly important.
 
Company Name

Whilst the company remains on Companies Registration Office (CRO) register, no other company can be formed with the same name, and you may even be able to get other later formed companies to alter their name if it is too similar to the one you have chosen.
 
Investors

Investors prefer to put their money into a company rather than a sole trade or partnership because if they purchase shares, their investment has more protection and their liability is limited to their shareholding (should the company run into difficulties and fold). Therefore limited companies can offer investors more security.
 
Bank Finance

Banks tend to prefer dealing with companies, again for similar reasons to individual investors. Furthermore, they are able to taking out extra security by lodging a ‘floating charge’ over the assets of the company. The charge effectively means the bank gets first call on the assets stated in the charge should the terms and conditions of the loan be breached etc.
 
The Succession of Shareholders

Transferring shares in a limited company is more straightforward to deal with than it would be to say, transfer a partner’s share in a partnership.

Tax Relief

Start up companies can avail of an exemption to corporation tax for the first three years in certain circumstances.  The relief is limited to the amount of employer’s PRSI that is paid by the company and only applies to new businesses.
 
Taxed on Withdrawals

Proprietors of unincorporated entities are taxed on their share of the business’ profits; regardless of what they actually withdrew. Companies are also taxed, but the rate of tax they pay under the current Irish tax regime is lower than individuals do, plus they pay no PRSI on their profits. The corporation tax rate is currently 12.5% while the marginal tax rate for individuals can be as high as 55%.  Therefore, incorporation might be appealing if the intention is to retain some of the profits within the business.

The Disadvantages of Incorporation

Administrative Burden

Directors and shareholders of the company may have to complete tax returns, and the company has its own filing requirements. It must submit its own tax return and annual accounts, and an Annual Return. Directors who own more than 15% of the shares of the company must also submit an income tax return even if all tax is paid by the company through the PAYE system.
 
Directors’ Responsibilities

Directors have a personal responsibility to delivery statutory documents to the CRO and failure to do so can be a criminal offence, in addition to late filing penalties.
 
Bank Finance

Whilst there is a perception that finance may be easier to obtain by companies, it is worth noting that it is common for banks to ask for personal guarantees from the directors (particularly in newly formed companies), which means the directors can still be liable for the company’s debts.
 
Less Privacy

The company’s details and accounts are held on public record and can therefore be accessed by anyone. Furthermore, information about the company’s directors, company secretary and shareholders can be accessed.
 
Accountancy Fees

Due to the level of reporting requirements, accountancy fees for companies are often higher than they would be for an unincorporated entity.
 
Separate Legal Entity

With an unincorporated business, the owners are free to make withdrawals without tax implications. However, the same is not true in a company situation and directors and/ or shareholders can often struggle to draw a distinction between the company and their own affairs.
 
Mixed-use

An unincorporated business holding assets with mixed-use or making expenditure for both private and personal purposes is pretty straightforward to deal with in terms of the tax treatment and disclosure. However, such items in a limited company can lead to tax charges, PRSI and additional reporting requirements.
 
Losses

Losses made by a sole trader or partner are far more malleable than if they had been generated by a company, and can for example be set against PAYE income of a spouse. Losses made a company can only be utilised by the company.

Date published 1 Jun 2012

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.