Benefits of a Private Limited Company
The main benefit of trading as a limited company is the limited liability bestowed upon the shareholders of the company.
Limited companies qualify for corporation tax at 12.5%, whereas, Sole Trader or Business Name registrations do not.
Directors or shareholders personal assets are not at risk in the event of a winding-up or receivership.
Operating as a limited company often gives suppliers and customers a greater sense of confidence in a business. Larger organisations will prefer not to deal with non-limited businesses.
The formation of a limited company is one simple and low cost method to protect a company name. Whilst this does not in itself give any rights to the use of the business name, many clients incorporate companies in anticipation of future development of new business or in order to protect the limited company name of an existing non-limited business for the future.
If a limited company becomes insolvent and is wound up, only the assets of the company are used to try to clear its debts. The officers of the company have no personal liabilities and the shareholders are liable only to the extent of any unpaid shares held which is rare.
By contrast if you trade as an individual, the creditors can claim on all your property, (other than the family home which is protected by the Family Home Protection Act 1976, unless it has been used to raise collateral), to satisfy the debts, and if this is insufficient you may be declared bankrupt.
Limited Liability Company Summary
- The company has a legal existence separate from management and its members
- Members’ liability is limited
- The company’s name is protected – Incorporation of a limited company protects it from use by another limited company
- It has flexible borrowing powers
- The company continues despite the death, resignation or bankruptcy of management and members
- The interests and obligations of management are defined
- Ireland’s Corporate Tax Rate of 12.5% is one of the lowest in the world
- New shareholders and investors can be easily assimilated
- Employees can acquire shares
- Appointment, retirement or removal of directors is straight forward
- Taxation: sole traders pay income tax. Sole traders income is taxed as the proprietors income, regardless of how much profit is retained as working capital, and interest on loans to the business is taxed as income
- Directors pay income tax and the company pays corporation tax on company profits, and with current rates of tax company profits earned and retained in the business are assessed to corporation tax at lower rates than if income tax were payable on equivalent profits earned by an unincorporated business
- Setting up a limited liability company offers just that – limited liability
- Shareholders in a limited liability company are only liable to lose the share capital they subscribe
- For sole traders and in partnerships, the individuals personal assets are at risk if there is a claim against the organisation
- A company is a legal form of business organisation. It is a separate legal entity and, therefore, is separate and distinct from those who run it. The company (and not the shareholders) is the appropriate person to be sued in the event that debts are incurred by the company which remain unpaid, despite demand
- Scope for greater company pension scheme to be secured through a limited company
- A limited company has a greater ability to raise finance by the issue of shares
- Shareholders looking for outside investors to invest may be able to take advantage of the tax incentive Relief for Investment in Corporate Trades, otherwise known as the Business Expansion Scheme (BES). The scheme provides individual investors with tax relief in respect of investment in certain manufacturing, service, tourism, research, constructing and certain music recording activities. This can substantially reduce the cost to an investor or his investment. It also enhances the ability of eligible companies to attract outside investment.
- Ownership of a limited company can be spread over a greater number of people
- Personal tax advantages can accrue for directors of a limited company
- There may be a greater degree of business credibility of trading through a limited company
- The rights of shareholders are normally clearly defined and protected
- Unlike a sole trader or partnership, a Limited company has a separate legal identity – this means that it is the company itself which owns property and that it is the company which may sue and/or be sued in respect of the business of the company
- The company continues to trade irrespective of director or management changes until the company is wound up
- There is limited liability and should the company fail, the liability of shareholders is limited to the amount of share capital they contributed
- Personal assets of directors or shareholders cannot be used to pay off company debts
Maximising the Tax Benefits of a Limited Company
One of the main focus for small businesses will be the maximising benefits to minimise tax.
This can be done by:
- Ensuring that your company makes pension contributions
- Claim the maximum possible expenses allowable under legislation
- Capital equipment used in your business is purchased and capital allowances claimed
- Ensuring that benefits in kind (insurance, health care) are paid out of the company
Other considerations are:
- Keep cash in the business as a loan to the business, so that the company receives interest gross
- Ensuring that other income streams are generated by the company and that expenses are allocated to that income, that way no tax is paid on some income
- Make investments through the company, but ensure sure you use up your own capital gains tax free allowance as well as that of your spouse, first before making investments from the company
- Often it is possible to reduce the corporation tax, with careful planning, by making dividend payments to its shareholders, and by the use of a company pension scheme
A limited company has an advantage of raising finance by selling issued shares to investors. The value of a share depends on the viability of each individual company, and not the nominal value of a share. It may also raise finance by means of overdrafts, debentures and loans.
Continuity of Business
The death or resignation of any officers of the company does not affect the structure of the company, which may continue to trade as before. Any shares held by them may be passed on to the others.
Protection of your Irish Business Name
Registration legally protects the company name against anyone else forming a similarly named limited company either in sound or spelling.