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Tax benefits of an incorporated business

When starting up a business many people are faced with the dilemma of whether to set up business as a sole trader or to incorporate and trade using a limited liability company. Trading by way of a limited company offers the benefit of limited liability to the company’s shareholders. Also additional capital may be raised by issuing shares to investors. This brochure considers other benefits of trading via a limited liability company.

  • Incorporated companies may qualify for the start up exemption. If a company’s corporation tax liability is less than €40,000, their tax bill could be reduced to nil if certain conditions are met. This exemption can be applied for the first 3 years of a business.

  • The profits of a sole trader will be taxed at an effective tax rate of 48.75% after PAYE, USC and PRSI are taken into consideration. In contrast, trading profits of a company are subject to the 12.5% corporation tax rate. Only amounts taken out as salary are subject to income tax at rates up to 52%. Where the profits of a business exceed the amount required to fund one’s personal lifestyle, the incorporation may give rise to immediate tax benefits.

  • Incorporated businesses can reimburse employees and business owners for business expenses on a tax free basis subject to Revenue limits.

  • In light of the caps introduced on personal pension contributions, pension funding via a company may be more tax efficient even when limitations on funding levels are taken into account. A company may claim a deduction for pension contributions into a company pension plan and the pension fund may grow on a tax free gross roll up basis. Personal tax is only payable when the pension fund commences making payments to the beneficiaries of the fund.

Although it is more time consuming to establish an incorporated firm in comparison to a sole trader, the tax benefits should be addressed from the outset. These benefits should be seriously considered when determining how to set up your business.

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