Mannion Lochrin & Co. helps many local businesses deal with the everyday issues surrounding the management of business in the Connemara region. We provide the expertise to allow each business make more informed decisions to improve their profitability. Some of the common themes and issues which we are regularly asked to advise on are listed below. 

• Should I incorporate the business?
• Advantages of incorporation
• Disadvantages of incorporation
• Audit requirements for companies
• What are the advantages of a Sole trader/Partnership?
• How to manage business profitability?

A key to any business success is to have adequate funding and a proper plan to grow the business into the future. Our firm can assist your business in reviewing operations, deciding on the best structure for the enterprise and planning for the growth of the business and the ultimate succession of your business to either the next generation or to external buyers. It is always prudent to plan for the future.  Mannion Lochrin & Co are here to assist you in that process no matter what stage of the business cycle you are at.

A question which is often put to financial advisors is whether a business activity should be formed as a limited company or as an unincorporated entity like a sole trader or partnership. The answer is (as is often the case) “it depends...”  There are many forms of company structure (limited by shares, limited by Guarantee, Public limited companies etc) so once the choice is made to incorporate you also need to decide which company structure is best for you.
If your business is growing rapidly and making substantial profits then a company structure makes a lot of sense as you can reinvest the profits in the business and not have to pay punitive taxes. Let’s look at the advantages and disadvantages of a company structure.

The main advantages of the company structure are:

1. Low corporation tax rate.
   The current rate of corporation tax in Ireland is 12.5% on trading profits. This is a low rate of tax by international standards and compares favourably to the marginal rate of income tax and PRSI on individuals which can be up to 48%. Company taxes are also not liable to PRSI.
2. Limited Liability
   A company typically limits the liability of the directors in case of a business failure to their subscribed share capital. Whilst this doesn’t protect you in the case of all creditors (banks typically look for personal guarantees from the directors) it does offer a degree of protection to the business person in the event of a business collapse.
3. Directors employee status
   A company is actually a separate legal entity so is treated as a separate “person” from the directors of the company. So it is possible for a director (and his family) to be an employee of the company which has benefits in maximising the tax credits and allowances of the family which typically can lower the overall personal tax bill of the family.
4. Pension contributions
   Under current legislation there are attractive benefits to have the company fund the pension fund of the directors allowing far greater flexibility and potential tax savings than for pension contributions of the self employed. It may also be possible for company directors to access their pensions sooner than if they were self-employed.
   

1. Increased Regulation
   One of the real consequences of the banking and corporate scandals of the last few years is that company directors (and auditors as a consequence) face increasing regulation with regard to companies and directors. In fact many failings by directors are now classified as criminal offences, a circumstance unheard of 10 years ago.
   
2. Increased costs
   It costs to incorporate a company and generally it costs more in professional fees to look after the affairs of the company and have the accounts audited. This is generally as a result of increased regulation on company auditors and can add significantly to the cost of having the books done. There are also filing fees and the requirement to keep the statutory records of the company up to date which add to the burden of running a company.
3. Double taxation
   Profits of the company are subject to corporation tax but if the directors withdraw cash from the business they are also liable to income tax on their salary/drawings. This is effectively a double charge to tax on the profits from the business. Certain companies also have a surcharge of 20% on their profits if they do not distribute their rental or investment profits.
4. Loss of Confidentiality
   All limited company accounts have to be filed with the companies office and are available for review by the public for a small fee. This means that anyone can see what your company accounts look like. Many regard this as a disadvantage.

Recent regulations have meant that certain companies may be exempt from preparing audited financial statements each year. (An audit is a detailed examination of the company records in accordance with audit regulations and guidance by a qualified registered auditor firm like Mannion Lochrin & Co.) If a company can avail of an audit exemption then it must satisfy the criteria below. A company may (it doesn’t have to) opt not to have an audit as typically this can result in less work having to be done by the registered auditor firm which can result in less regulatory work and fees being charged to the company.

Audit exemption:
A company with a turnover of less than €1,500,000 may be exempt from an audit. For accounting periods commencing on/after 1 July 2004, a company must satisfy all of the following conditions in order to avail of audit exemption:

Turnover not exceeding €1,500,000 per annum
Balance Sheet total not exceeding €1,904,607 (gross assets only, ignore liabilities)
Employees not exceeding 50
Annual returns of the company must be up to date

Unless it is the first financial year of the company, the company must have satisfied these conditions for both the current year and the preceding financial year. Accounts must still be prepared for submission to the Registrar of Companies and to be laid before the Annual General Meeting.

The advantages of a sole trader or partnership are in the main the opposite of the disadvantages of a company formation in that you generally have

complete confidentiality
less regulation
only taxed once on the profits
avoid the costs and regulation associated with companies

However there are drawbacks to a sole trader set-up also. Generally if your sole trader business goes belly up you could lose everything, including your home and savings as you pay for your losses. However one of the main drawbacks is that you pay up to 48% on your profits each year and this can prove a significant cash flow problem for any business with large profits.

Main tax and regulatory issues for sole traders/partnerships are:
You must register the business with the revenue commissioners.
Audit not required.
Income tax returns arising in a particular tax year (ending 31 December) must be paid by the following 31 October (eg. the 2004 tax year must be filed on or before 31 October 2005).
Preliminary tax payment due for the tax year must be paid by 31 October of that tax year. The tax paid must represent 90% of the individual’s final liability for the current tax year or 105% of the ultimate liability for the previous tax year. Any balance of tax due for current tax year must be paid by 31 October of the following year. (for example 2004 balance of tax due 31 October 2005).
Must submit vat returns, if vat registered on a bi-monthly basis. In certain cases monthly or annual returns may be permitted.
If business has employees, must submit PAYE/PRSI returns on a monthly basis. In certain cases annual returns may be submitted. The business must also submit a P35 for all employees at the end of the tax year.

Any decision on the kind of structures you use should be taken in consultation with us so that all possible angles are considered from a regulatory and taxation point of view.

Businesses should never be complacent about their continued success and they should constantly review their operations to ensure they are maximising their return and planning for a future where increased competition and price pressures are likely to be the rule rather than the exception.
So what should business owners do to review their operations with a view to maximising their returns? Well business profitability is a function of a number of factors which need to be considered both individually and collectively. They fall under the following major headings. And they are:

• Sales/Turnover
• Gross Profit
• Expenses
• Taxation

This is actually the order in which these headings appear in your financial statements but they are all inter-related and steps taken to improve one heading can adversely impact on other areas so the key is to consider any measures collectively. Remember the goal here is to maximise the after tax return for the business owners.
 
Sales/Turnover:
Curiously you don’t necessarily have to increase sales to improve profitability; in fact it can happen that reduced sales will improve your bottom line return. What you need to do is critically review your sales number and see how much it actually costs you in purchases, employee time, shop space, expense overheads etc to generate those sales, and compare the results to other areas of your business. For example if you were running a pub this might be a review of your food versus drink sales and the costs associated with each. What might result from this review is that you identify that some areas of your business simply are not profitable enough so you may decide to either charge more for the service or discontinue any loss making activities.
 
Gross Profit percentage:
Your gross profit percentage measures the difference between the sale of goods to your customers and the cost to you to purchases those goods. What affects the gross profit percentage is the cost to you to purchase the goods and the price you can charge to sell those goods. Firstly you need to look at purchase costs to see if goods can be sourced cheaper. This review needs to be ongoing in every business as the cheapest supplier today may not be the cheapest supplier in three months time. Secondly you need to review your pricing structure. Are you too dear or too cheap? If you are too dear then sales will be depressed and this will affect turnover and profits, if you are too cheap then you are not maximising the profits and are selling your wares for insufficient return. Striking this delicate balance is not easy so pricing policy needs to be constantly reviewed.

Expenses:
Expenses can be deceiving. Often businesses only realise what the actual associated costs of running the business are when they receive the financial statements from their accountant. This is a bit too late to address any excess costs. Every expense heading needs to be reviewed to ensure the business is getting good value for the money it spends (and yes, this does include the accountants’ fees!) Good value doesn’t necessarily mean cheapest however. Skimping on the insurance premium because you omit a few key facts can have disastrous consequences as can getting cheap “fireside” tax advice! You just need to review all your service providers (like electricity, telecommunications, insurance, bank charges and interest, advertising, professional service providers etc.) to ensure you are getting good value for your hard earned money.
 
Taxation:
Taxation is a real cost to business and one which a business neglects at its peril. However there are ways in which a business can work to legally minimise its tax bill through various revenue approved schemes. As tax can be peculiar to businesses circumstances it isn’t advisable for me to give general advice as each scheme needs to be tailored to individual businesses, but in general it involves allowances and deductions such as approved expense claims, pension planning, family employees and tax designated investments among others.

A profitability review is a constant requirement for those in business. It is necessary for each business to constantly review their sales mix, pricing and strategy and to tackle costs both from suppliers and service providers.

By improving the underlying profitability of the business you are ensuring that you are capable of facing increased competition and challenging business conditions in the best possible shape and therefore safeguarding your assets and income security into the future.

  
Mannion Lochrin & Co.,
Chartered Accountants & Registered Auditors,
Market St, Clifden, Co Galway
Telephone: 095 30030  :  Fax: 095 30031
e-mail: info@mannion-lochrin.com