You are leaving employment and setting up a company – wow, your own company. That’s something to be very excited about. You are becoming self-employed. That’s a little scary as it’s a step into the unknown, but it has lots of opportunities too. It’s scary because you now must generate the income to pay yourself. But you’re your own boss, free from the corporate world, and answering to a higher power.
In this blog, we’ll examine why you would set up a company and the initial steps to take. Let’s look at
- Why a company
- Initial Steps
- Salary
- Summary
Why a company?
Why a company? We’ll call you Tom. You are over 50 and have been in employment for over 20 years, most likely with the same employer. You are on a great salary. Well over €150,000, and you have particular skills. Skills that will be in great demand from people who need your help. Given your experience and skills, your charges will match the value you bring to a business. They won’t be in the hundreds but in the thousands.
In year 1, your turnover will be over €100,000. Let’s say Tom’s turnover is €140,000 in his first year. In year 2, that grows to €180,000. Your costs are low. A laptop, phone, Chat GPT, IT, Insurance, some motor & travel, and accountancy fees. We’ll estimate those at €20,000, but they won’t even reach that number.
So, a profit of €120,000 in Year 1 and €160,000 in Year 2.
Sole Trader
You can be a sole trader and not trade through a company. A common thought is
“Sure, I’ll start as a sole trader, and if it goes well, I’ll set up a company.”
This is delaying the inevitable. You’ve built up huge knowledge, skills, and experience. The people who will be using your services will be expecting you to have a company. They could be other large corporates. And even your former employer. It could be that you got a redundancy payment from a former employer. They won’t rehire you as a sole trader, but could as a consultant with your own company.
The expectation is that you will have a limited company. Some larger companies only expect to deal with other companies. Their procurement systems are set up that way.
Eye-watering taxes
As a sole trader, your tax bills will be eye-watering. Like when you’re cutting onions, only way worse. Revenue will come into your account every November and take a massive chunk of your cash. November pain to match the November rain. Tom’s wife, Sarah, has a great job and earns €80,000 a year. The share tax credits and the lower rate band. Let’s look at Tom’s taxes as a sole trader in Year 1.
| Profit Year 1 | €120,000 |
| First €44,000 x 20% | €8,800 |
| Next €76,000 x 40% | €30,400 |
| Total | €39,200 |
| Less Personal Credit | (€2,000) |
| Less Earned Income Credit | (€2,000) |
| Add USC | €5,644 |
| Add PRSI | €4,920 |
| Total | €45,764 |
A tax bill of €45,764 on a profit of €120,000 is an effective tax rate of 38%.
In Year 2, Tom’s profit is €160,000. The extra €40,000 profit in year 2 will be subject to 52.1% tax. That’s an extra €20,840 in year 2. Your effective tax rate in year 2 climbs to about 42%
| Year 1 | €45,764 |
| Year 2 | €66,604 |
| Total | €112,368 |
If you’re a sole trader with these numbers, you either can’t trade through a company or are mad. Then again, you could be happy paying Revenue 40% of your profits every year!
Initial Steps
The initial steps are around the company name. What will it cost me to set a company up? What about the ownership structure? Will I need a new bank account? Are there other things with the CRO and Revenue? Lots of questions to get your head around.
Company Name
You can have a company name with your name in it, unless there’s a company with that name already, or a very similar one. Say Tom Dunne Ltd. You can go for a name that includes the service you provide. Tom is an expert in sales and marketing with a proven history of exports into new countries. He calls his new company Opening Markets Ltd, or the company can be Tom Dunne Ltd trading as Opening New Markets.
The “trading as” name isn’t the company name, but a trading name, and that name can be on your bank account. You can also register the business name with the CRO. When we set up a company for a client, we look for 3 names with the preferred name number one. Our company formation agent will check with the CRO to see which name from the list works.
Cost
Our cost to set up a company for you is €851 plus VAT. That’s a one-stop shop service to do all the work for you, and includes
- Company formation agent fees
- CRO Fees
- Tax registrations – company
- Tax registration – Director
- RBO registration
- Complete all paperwork for you
- Liaise with the formation agent
We do all the work and ensure it’s done right and on time. This is a tax-deductible expense for your company and, once you are VAT registered, you’ll get the VAT back.
Ownership Structure
All the companies we set up have 100 shares. If you own 80 of those shares, you own 80% of the company. The normal question we get is, should my spouse or partner own some of the company? If they work in the company, I would say yes. If they have a full-time employment separate from the company, I’d say no. What percentage a spouse gets should depend on their involvement in the company. A spouse who is very involved and dedicates all his or her time could get up to 50%. It very much depends on the circumstances.
Don’t worry if you don’t get the shareholding right at the start. It is possible to transfer shares to a spouse down the line. There can be tax benefits for a spouse who holds shares in the company and is a full-time working director. The main benefits are to maximise CGT reliefs down the line. Like Retirement Relief or Entrepreneur’s Relief. However, it’s better to get the shareholding right at the outset. That’s because the CGT reliefs depend on how long you own the shares for.
Bank Account
Yes, you’ll need a new bank account in the company name. To get a company bank account, the company must be set up first. When the company is set up, it has a CRO number on a cert of incorporation. You’ll need that number and the certificate to open a company account.
We usually recommend AIB or BOI. AIB mainly, as we have a great relationship with the local branch in Tramore. The reason for that is that we can import company bank statements from AIB or BOI directly into Xero. Cathy tells me that this is now available with PTSB and Revolut, too. Interesting. Well, for me anyway!
One thing to check is if there are any free banking offers. Remember, you are setting up a new business account, so there could be free banking for a year or two.
CRO & Revenue
As a director of a company, you have certain filing requirements with the CRO. You must file a B1 return within 6 months of the date of incorporation [date on the cert of incorporation]. After those 6 months, you file an annual B1 return with a set of abridged accounts with the CRO. There are fines and penalties for missing these deadlines.
The initial interaction with Revenue is to register the company for taxes. In most cases, you’ll be registering the company for Corporation Tax, VAT, and PAYE. Registering for VAT can be tricky, so be ready to engage with Revenue if they start asking questions. If it’s an Irish-only VAT number you need, there will be fewer issues. But if you are trading across the EU and need an Intra-EU VAT number, that will take longer.
You’ll have to register yourself for taxes, too, if you aren’t already registered. An owner-director, who owns 15% or more of a company, must file an annual tax return. You become a chargeable person within the self-assessment system.
Loan to the company
The company bank account is empty, and you won’t get paid until the end of next month. The company will have some set-up costs. You need a new laptop and phone and want to set up a website. You decide to put €10,000 into the company. That’s a loan from you to the company, and it owes that back to you. You can take that loan back tax-free.
Salary
What salary should I take? That will be different for everyone and will depend on your circumstances. What salary do I need? What can the company afford to pay me? Is my spouse working? What are my monthly outgoings?
Let’s assume that Tom Dunne needs €4,600 net every month. To get that figure, he’d need a salary of €80,000
| First €44,000 x 20% | €8,800 |
| Next €36,000 x 40% | €14,400 |
| Total | €23,200 |
| Less Tax credits | (€4,000) |
| Net Tax liability | €19,200 |
| Add USC | €2,444 |
| Add PRSI | €3,280 |
| Total Tax | €24,924 |
| Net Salary | €55,076 |
| Net Monthly | €4,590 |
Your salary is a tax-deductible expense.
Year 1
| Sales | €140,000 |
| Less Expenses | €20,000 |
| Less Salary | €80,000 |
| Net Profit | €40,000 |
| Tax on Profit x 12.5% | €5,000 |
The total tax liability as a company in year 1 is €30,000. Corporation Tax of €5,000 and PAYE on your salary of €25,000. Compare that to the sole trader liability in year 1 of €45,764. A tax saving of over €15,000. Would that be better going into a company pension for you?
Year 2
| Sales | €180,000 |
| Less Expenses | €20,000 |
| Less Salary | €80,000 |
| Net Profit | €80,000 |
| Tax on Profit x 12.5% | €10,000 |
The tax liability of the company in year 2 is €35,000. Corporation Tax of €10,000 and PAYE of €25,000. But remember the sole trader tax liability in year 2 was €66,604. A tax saving of over €31,000 or €46,000 over two years. Think of that number over 3, 5, and 10 years.
More money in your company
You have more money in your company. More money to make it work for you and the business. That’s the problem with a sole trader structure. Once you go into the higher tax rates, you are giving half of it away to Revenue. Fifty-two percent tax on profits kicks in at a low level, and as profits increase, you end up paying a small fortune. That’s the beauty of a company. You have more room to manoeuvre. You set the salary, so that gives you greater flexibility and lower taxes.
And what can your company do for you? The Short answer is to make your life better. Some ways include
- Company pension
- Company Car
- More money to repay debt
- Vouchers
- Bike to work
- Medical insurance
- Bonus
Having more money gives you more options. You can invest in growing the business, hire a new staff member, or take a higher salary. More options, more flexibility, and more financial freedom.
Summary
If you got as far as the summary, I am very happy that you did. You are very patient, and the topic must be relevant to your situation. You’ll see from the above that I’m a major fan of the company route. I went the sole trader route first and suffered every November. After being through both, I am very happy that our business is in a company. For higher-earning executives leaving employment, setting up a company makes sense. Income will be higher, profits will be higher, and taxes will be lower.
Need help setting up a company to kickstart your new business journey? If so, start here
