Make the most out of redundancy Sunday, January 11, 2009 - By Caroline Allen In total, 40,607 people were made redundant from their jobs last year. It is a worrying figure, but according to the experts, redundancy can throw up as many opportunities as it takes away for candidates with an entrepreneurial streak and a will to succeed. By using the ‘skills learned making money for someone else’ and a redundancy package as start-up finance, candidates can take the plunge and go into business on their own, according to Andy Quinn, partner, HLB Nathans. Start-up funding While banks are increasingly cautious, money is still available for lending. ‘‘The more information you give to a financial provider, the better the prospect of securing finance,” said Quinn. ‘‘A mix of equity and bank finance is advisable to avoid the pressure of significant debt early on. In start-up businesses, cash-flow is usually critical so that the less that has to be paid out to service debt, the more cash is available to pay other costs and re-invest to build the business.” Business plan Quinn advised start-ups to devise a solid business plan with budgets and cash flow projections at the outset. ‘‘Taking into account variables, such as interest rate rises or reductions, inflation and slower economic growth, is essential and should be prepared at the on-set with the advice of a qualified accountant,” he said. No two start-ups are alike, so a good business plan should indicate what type of finance is needed to get the new business started. ‘‘This will also provide the bank with the information needed when assessing whether to lend money,” said Quinn. Realistic cash projections and skilful budgeting are vital at start-up stage, according to Greg Swift, chief executive, Dublin City Enterprise Board. ‘‘It is a sad reality that profitable companies can fail when they run out of cash and cannot pay their bills. A common mistake is underestimating the amount needed to run the business,” said Swift. Market research Market research will help entrepreneurs determine the long-term viability of a start-up business idea, said Swift. ‘‘Market research may be undertaken on many levels, but the objective is always the same - to find out if there is a market for your product or service at a price that will recompense you adequately,” he said. ‘‘At least ask potential customers what they think of your product or service and how much they would be willing to pay.” Trading options The three available trading options are sole trader, limited company and partnership. ‘‘If you intend operating on your own or project a relatively low turnover, it is likely that registered sole trader status will be suitable for you,” Swift said. If you intend working with others and foresee that the business will incur debt, the protection afforded by incorporating as a limited company will appeal, said Swift. ‘‘A limited company must have at least two directors and is subject to considerable legislation. Failure to comply with the rules of corporate governance by directors will result in the removal of protection afforded by limited liability,” he said. The principal benefit of trading as a limited company is the limited liability it gives the company’s officers and shareholders, Quinn said. However, this option may call for a yearly audit, creating additional costs. ‘‘New increased audit exempt limits mean that more businesses are now in a
position to avail of audit exemption,” said Quinn. ‘‘This means they can avoid the higher costs involved in the annual audit of the business’s accounts. Once your cash flow projections have been prepared, you will be in a better position to review this.” Tax factors From a tax perceptive, there are many factors to consider, said Quinn. ‘‘Close companies - your typical Irish family company - have certain tax penalties and restrictions imposed on them,” he said. ‘‘For example, certain benefits provided to shareholders may be treated as dividends and no tax deductions will be granted to the company for such payments. In addition, dividend withholding tax must be paid to Revenue. ‘‘Loans to shareholders may be subject to a tax penalty, which may be repaid to the company when the loan is repaid. Benefit-inkind may also apply. There are also company law issues to be considered.” Interest paid to shareholders in a company, on loans to that company, may also be treated as dividends - no tax deduction for the company and dividend withholding tax should apply. ‘‘Investment income will be taxed at the rate of 25 per cent and may be subject to an additional 20 per cent tax if not distributed within a certain period,” said Quinn. Limited benefits Limited companies can benefit from some tax advantages. ‘‘The Finance Bill introduced a new relief from corporation tax for new companies commencing to trade in 2009,” said Quinn. ‘‘The exemption is granted in respect of the profits of a newtrade and chargeable gains on the disposal of any assets used for the purposes of a new trade. ‘‘The exemption is granted by reducing the total corporation tax - including the tax referable to capital gains - relating to the trade to nil. Full relief is granted where the total amount of corporation tax payable by a company for an accounting period does not exceed €40,000.” Marginal relief is granted where the total amount of corporation tax payable by a new company for an accounting period amounts to between €40,000 and €60,000. ‘‘No relief applies where the corporation tax payable is €60,000 or more. Therefore, potential relief of up to €120,000 is available,” said Quinn. ‘‘Relief is restricted for companies carrying on road transport activities to a total of €100,000 in accordance with EU regulations on State aid. This is an important new relief that should be considered and will come into effect on the passing of the Bill, subject to discussions with the European Commission to ensure the State aid regulations are met.” The exemption is available for three years from the commencement of the new trade and separate exemptions are available for each new trade. A new trade is one set up and commenced by a new company in 2009. ‘‘The trade cannot have been previously carried on by another person, or its activities cannot have been carried on as part of another person’s trade. Certain trades such as land dealing, petroleum and mineral activities are excluded, as are professional services companies,” said Quinn. Limited companies can also provide for salaries for the directors and the directors’ family. ‘‘This means that the maximum use of personal allowances can be made, while the balance may be left in the company and taxed at 12.5 per cent until a better use is found for the cash, for example, pensioning or building up the business,” said Quinn.