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Limited Company Incorporation

Limited Company Incorporation – ‘’to incorporate or not to incorporate, that is the question!’’

Neville Murphy is a Chartered Accountant. Having worked in investment banking and in the ‘’Big 4’’(accounting and advisory practices), Neville is well placed to advise on a range of real life topics.

 

At certain points in the entrepreneurial lifecycle comes the decision of whether to incorporate their business or not. It is often deemed a daunting prospect which may open one up to a whole new level of bureaucracy and administration and this frightens some people. As a Chartered Accountant, who deals with this day in and day out, it’s easy for Neville to bat these concerns away but Neville does understand these valid concerns. After-all, someone who is going about their business now brings a new party to the table when they incorporate, the CRO (Companies Registration Office). This brings additional filing requirements and additional costs.

 

 

Summary : 

 

1. Why would I incorporate? The good bits……

2. The bad bits…..

3. Is incorporation easy?

  • a. How long does it take?
  • b. When should I do it?

4. What happens after incorporation?

  • a. Should I do it?

5. To conclude

 

 

1. Why would I incorporate? The good bits……

 

The main benefit is that of ‘’limited liability’’. Importantly, directors or shareholders personal assets are not at risk in the event of business failure. If a limited company fails (becomes insolvent) and is wound up, only the assets of the company are used to try to clear its debts (in many cases these may be office equipment and fixtures, often with a low value). The officers of the company have no personal liabilities and the shareholders are liable only to the extent of any unpaid shares.

 

From a practical point of view, limited liability may result in business insurance policies being lower as the insurance companies take the view that their own potential liabilities may be limited.

 

Using personal assets to guarantee business loans is a very risky practice as the creditors can claim on all your property to pay the debts, and if this is insufficient you may be declared bankrupt (other than the family home which is protected by the Family Home Protection Act 1976, unless it has been used to raise collateral for financing)

 

A limited company is deemed a distinct entity, separate from that of the parties that operate the business. Should a legal issue arise, it is the company, and not the parties involved that are named in the proceedings. 

 

A limited company can have a value that is attractive to outsiders who may wish to purchase the shareholdings. This is very difficult with a personal business! Also, a company will continue after the death of the owners, as shares can be passed over, meaning the company can theoretically have a very long life. On this point, shareholders rights can be clearly defined and protected.

 

Many sole traders in Ireland are familiar with the October/November Income Tax deadline whereby they are often required to pay lump sum tax payments to the Revenue Commissioners. Although technically a sole trader may make sporadic payments to Revenue, most don’t. With a limited company, you would effectively become an employee of the company and you could take monthly payroll amounts and pay tax to Revenue the month following, via the PAYE system. This spreads the burden of tax throughout the year and leaves no nasty surprises for October/November.

 

On the issue of tax, limited companies in Ireland qualify for corporation tax at 12.5% of profits. This is one of the lowest tax rates in the world. Also, should you have employees and pay Employer’s PRSI on their behalf, there is an exemption available for start-up companies for 3 years. Having a company pay a pension on your behalf is also a major tax advantage, as is charging expenses to the company for the use of your private car. Should you travel for work, you can claim the ‘’civil service’’ travel expenses and the company can pay this to you tax free. A company car is becoming less attractive as Benefit in Kind (BIK) is due and this can be penal, depending on the vehicle. Electric vehicles however have 0% BIK and you can claim accelerated capital allowances which will reduce your Corporation Tax bill.

 

It may be strange to read this, but there is a greater image, and certainly a more professional image projected by operating as a limited company. Companies are deemed as more credible and more doors are opened to them as a limited company. Particularly in Ireland and amongst the multinational sector, I have seen that large companies will not subcontract to sole traders and insist that those subcontracted are limited companies only. This protects the multinational company from falling into certain employee rights issues that may accrue to long standing contractors.

 

Neville Murphy & Associates can help in the initial setup of the company and can assist in the Revenue registration process. We understand that this may seem a daunting and complex process but we can help reduce the burden.

 

 

2. The bad bits…..

 

Full Disclosure! This is how Advisory companies like Neville Murphy & Associates do business! Limited companies fall under the remit and scrutiny of the CRO. This means that accounts have to be prepared, and Board Meetings (usually in the form of Annual General Meetings) have to be held. Accounts are prepared and ‘’abridged’’ or shorter versions are submitted to the CRO, 9 months after the year end. Abridged accounts (although with less detail than the full accounts) are available to the public upon a payment of a fee to the CRO. All that can be seen however is the Balance Sheet which details cash balances, fixed asset values, amounts to the business and amounts due to other parties. No trading details or wage details are visible.

 

As a sole trader, no accounts are necessary and your only compliance requirement is to that of Revenue, as mentioned usually in October/November.

 

Because of the added compliance requirement with a limited company the fees payable are usually higher than that of a sole trader. The filing fee is low at €20; however the accountant fee may vary depending on the level of work required.

 

 

3. Is incorporation easy?

 

Incorporation is now available online on the CRO’s online portal (CORE). There is a lot of technical language involved – in particular around the area of share capital and issuance of shares. A ‘’constitution’’ is required to be produced – this sets out the internal rules and regulations of the company. The cost to file the Incorporation documents is €50 however it may be best to use an Incorporation Agent to do the work.

 

This ensures proper completion and prevents costly mistakes. This should cost approximately €200 to €300. You’ll be required to nominate a director (usually you) and a secretary (can be a company or a person, needs to be different from the director if there is only one director). You’ll also need to nominate a registered office – some people like to use an accountant’s office or a 3rd party address. This ensures that important post is dealt with. All that you will need to do is sign the paperwork before it is uploaded onto the CRO portal.

 

 

How long does it take?

 

Budget for a week, however, in the Covid-19 period, it has taken up to 3 weeks.

 

 

When should I do it?

 

Ideally before there is value built up in your sole trade; or even before you begin to trade! This is because if your sole trade is profitable, and if you have assets such as computers, vehicles etc you will be effectively ‘’selling’’ or transferring the trade to the limited company. This creates tax issues as the seller, and conversely as the buyer. Although there are ways around it by issuing shares to the value of the assets and trade you transfer, it may still put you on the radar of the Revenue Commissioners!

 

 

4. What happens after incorporation?

 

You will receive a Certificate of Incorporation from the CRO. You can use this to open a company bank account and register the company for taxes. You will file your first Annual Return with the CRO after 6 months – this is just a paperwork exercise and informs the CRO of any changes to directors or shareholders. Another Annual Return is due 12 months after this, at which point you will need accounts. Neville will tell you when returns are due. Missing returns is not good for business and we do not subscribe to ‘’sell and forget’’ tactics.

 

 

Should I do it?

 

We’re biased but the benefits are tangible. However, it is not advisable if the business is not full time and is not generating a significant level of income (hard to approximate but in excess of €20,000 per annum). It is hard to justify the expense of CRO fees and accounting fees, plus the additional bureaucracy and administration is the company is not generating income. However, companies can be left in a dormant state and as long as you meet the filing requirement, the company will live on. Accounting fees for a dormant company are not material in the grand scheme of things as there is very little work to do.

 

 

5. To conclude

 

In conclusion, the benefits outweigh the negatives! You can sell a company, it’s harder to sell a person!

 

Should you be considering incorporating a company and you wish to discuss the pros and cons – please reach out to Neville Murphy & Associates for a confidential discussion.

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