Accounts review the first step towards making switch
The first step to take in deciding whether or not you would be better off trading through a limited company is to review your farm accounts for the past number of years to see if there is a sustainable trend.
The main figures which you should look out for and be aware of are: net profit, drawings, investment income and rental income. These are the starting points for discussion.
Sole traders are subject to income tax on the full amount of their profits in the year in which they are earned, regardless of whether or not they are taken out of the business. If your profits equal or are less than your drawings, it will most likely mean that you are not a candidate for operating your business through a limited company.
In the following example, the farmer is less than 70 years of age, married, has no off-farm income, with two dependent children and the tax year is 2011. Example A shows the tax implications if your profit equals drawings. There is no difference in the tax liability if operating through a sole trader or limited company.
If your profit exceeds what you take out as drawings, there may well be a case for operating through a limited company.
In example B, there is a significant tax saving of €19,750 by operating through a limited company.
However, the balance of money is in the company's bank account, and you will be taxed at your marginal rate of tax if you decide to take this out the company.
The investment and rental incomes mentioned earlier are also important.