This is a common issue for entrepreneurs, Should they operate as a sole trader or limited company. From a purely tax point of view if your company profit is larger than you need to live on a Ltd company is the likely to be the most tax efficient option.
The savings would work as follows,
Profit for yr €1.2M
Drawings required to live off €200K (These will be taxed as income tax either option)
Remaining Profit €1M
Taxed as a sole trader
€506K income tax (approx)
Remaining Profit €494k
Company option (again using €1M remaining profit)
€1M @12.50 % = €125k corporation tax due
Remaining Profit €875k
BUT funds are stuck in the company , final step is to ultimately liquidate the company and pay CGT on the increase in your share holding
Current CGT Rate 25%
So remaining funds of €875k @ 25% = €219K
Remaining Profit €656K
Saving €656k-€494k = €162K
There is also better scope for sheltering pension contributions using a company and you can get limited liability.
Disadvantages include increased compliance costs, Solicitors, Accountants ect.
This technique would be used as part of a long term tax plan and would in the real world is not that as simple as above as capital gains rates may change ect.
Voluntary liquidation comes with its own issues you may not be allowed operate as a director for a time afterwards all of which would have to be researched before embarking on this.
This blog post is from an Accountant based in Galway if you would like to discuss this further please do not hesitate to email
Disclaimer: This blog post is my opinion and should not be treated as tax advice.