The decision to form a limited company or not when starting in business depends on a number of factors, some of which are;
Level of profitability
Level of existing income
Cost and administration
If your profits from the new business are going to be more than sufficient for you to live comfortably, then you should consider forming a Limited Company (ie.incorporation).
If you have existing PAYE income and the new business will run in tandem and you are already paying tax at the top rate, then you should incorporate.
If you anticipate your business growing rapidly and you will employ people, then, if you incorporate at the beginning you will be able to avail of Revenue’s 3 year start up relief on corporation tax subject to it being a qualifying trade.
In forming a Limited company, you are creating a new legal entity. There are annual costs associated with completing accounts, filing regular tax returns with the Revenue and filing annual returns with the Companies Registration Office. So there is an extra layer of cost and red tape, however, if your business is a success, the cost is minimal. If you stop trading, you will also need to wind down the company which has a cost.
If you have a business idea that you are going to run part time and maintain your existing PAYE employment, you need to realise that the profits of the business will be added to your gross income in calculating your net tax liability. If you are already paying tax at the top rate, then all the profits will be at the top rate.
If you incorporate the new business you will pay 12.5% on the profits, allowing you to reinvest the money within the business to help it grow. If you want to take the money out, you will then pay the top rate of income tax on any funds removed.
The ability to reinvest the profits in a new business, if you have an existing job, may be vital to the growth of the business. Your plan might be to run your business and employment in tandem until the new business can support you full time.
If you start as a sole trader and later on through the business cycle decide you are now big enough to incorporate, you will not be able to avail of the 3 year Corporation Tax Start up relief. To get this relief, you need to employ people (have a PRSI bill) and have a qualifying trade. You may tick those boxes, but transferring your existing sole trader trade into the limited company will disqualify you from the relief.
Other considerations on forming a Limited company might include perception of scale by future clients.
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