Best way to use €300k profit a year business

[greener99]

Personal details
Your age: 36

Income and expenditure
Self-employed €70k + van

Monthly take-home pay: €3,720

In general are you:
(b) saving €1500 per month

Summary of Assets and Liabilities
Family home value: €300k
Mortgage on family home: €215k
Net equity: €85k

Cash: €43k (Trading 212)
Company shares : 100%

Total net assets: €128k (Cash & equity)

Family home mortgage information
Lender BOI
Interest rate 3.85%
Type of interest rate: 1 year fixed (10 months remaining)

Remaining term: 34 years
Monthly repayment: €1,049.17

Other borrowings – car loans/personal loans: None

Do you pay off your full credit card balance each month? Yes

Pension information

Value of pension fund: €40k in a PRSA

Other savings and investments:
€150k cash in the business bank account that's needed for cashflow
None

Other information which might be relevant

Life insurance: Through work


What specific question do you have or what issues are of concern to you?
- In the last 6 months I have bought out the other owners from the business via a management buy out (cash built up in the company)
- The business generates €300k in profit a year after I am paid €70k. This profit is consistent for 3 years and I expect this to stay the same
- I am comfortable on €70k and don't need more
- I recently bought my property but my girlfriend (soon to be fiancee) has a mortgage free home that we're planning to move to in 18 months. She lives with me now and pays some of the mortgage
- I have learned a lot from reading the advice on this forum and I would appreciate feedback on some questions below. Thanks in advance

Questions
1. What is the best pension vs cash split based on my age and profit? I'm conscious my PRSA is low at 40k. Is €150k into the PRSA & €150k cash the best use of the profits? It seems to be a cardinal sin to leave money in the business and I have no plan to build cash to exit. For the €150k cash, if I net €75k, €25k would go towards a potential wedding and the rest either into an emergency fund or pay down the mortgage.
2. Before discovering this forum I had a €50k target of emergency cash in my mind, is that appropriate? I know it's a personal question but my business is steady enough.
3. If my girlfriend says yes (fingers crossed) I will employ her to help me on the admin side and pay her a salary plus put money into her PRSA. One consideration I have to leave some of the profit from this year in the business is that she needs a new car. Is it better to buy a car through the business or pay out the cash and buy a normal car? We'll be buying something for €50k. My initial thought was buy through the company and put costs through but after reading some forums I now think paying the cash out, buying for a bit cheaper (€35kish) privately and claiming mileage makes more sense. She does a lot of driving to her full time job (2hr commute 4 days per week at present) which makes me question whether buying the €50k+ car and paying the BIK might more sense for her in comfort and the business to take the depreciation hit. What is the best way to do this?

Thanks for your help

 

[Brendan Burgess]

€150k cash in the business bank account that's needed for cashflow

- The business generates €300k in profit a year after I am paid €70k. This profit is consistent for 3 years and I expect this to stay the same

It seems to be a cardinal sin to leave money in the business and I have no plan to build cash to exit.

This is the key issue you should address and the rest follow on from this.

Needing €150k in a company that makes €300k profit seems to be a lot.

I would take out all profits of the company (either via salary or pension) and not pay any Corporation Tax.

You can then build up a €100k cash pile in your own name outside the company.

If there is a cash-flow problem through slow payers or investment, you can always give a loan to the company and pay it back when the cash flow improves.

As the company is so profitable, your bank should give you an overdraft facility which you could use as well in the event of a cash flow problem. Apply for this well in advance of needing it not when you suddenly need it.

 

[Brendan Burgess]

I will employ her to help me on the admin side and pay her a salary plus put money into her PRSA.

Why?

I am no expert on relationships, but it would strike me that you are better keeping your business and your girlfriend/fiancée/wife separate if she has a full time job already. If she is driving 2 hours a day, it sounds like a fairly full-time job.

If your business needed a full time administrator and she were unemployed, it would be different.

Likewise I would not be messing about providing a temporary employee with a company car. It's the type of thing which Revenue would question and ask for justification.

Keep life simple. Keep things separate.

 

[Brendan Burgess]

I wouldn't panic about pensions at age 36.

I would take the profits out of the company.
I would build up €100k cash outside the company which you can lend back if needed.
Maybe then put the balance into a pension fund.
But if you put €150k a year into a pension fund, you will burst through the amounts where it's no longer tax efficient in a few years.

Brendan

 

[greener99]

Thanks Brendan - We’ve never taken debt on so we keep the company well funded but I see now that an overdraft and a personal loan option is much more beneficial.

Also agree on the relationship piece - I was just trying to maximise the money but it’s too complicated.

RE the pension, I’d much rather take the cash and put a smaller amount into the pension as standard. Paying €150k in would make me sick but I was equally sick paying the income tax until I read other posts on this website. Appreciate the help

 

[Steven Barrett]

From 2025, employer paid PRSA contributions will be restricted to 100% total emoluments, so if you get €70,000 from the company total, that is what you can put into a PRSA. While your pension is behind the curve, you should catch up putting €70,000 a year into it. You should also ensure that you are creating a business that can be sold in the future, it is an asset of yours...and with profits of €300,000, it should be a good business to sell.

I agree with Brendan about maintaining cash in the business. Beyond cash for cashflow purposes (the amount is for you to decide, we don't know what industry you are in), you should either put the excess into pensions or take it as income.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Brendan Burgess]

Also agree on the relationship piece - I was just trying to maximise the money but it’s too complicated.

Don't complicate your relationship to make it more tax efficient on an artificial basis.

 

[conor_mc]

From 2025, employer paid PRSA contributions will be restricted to 100% total emoluments, so if you get €70,000 from the company total, that is what you can put into a PRSA. While your pension is behind the curve, you should catch up putting €70,000 a year into it. You should also ensure that you are creating a business that can be sold in the future, it is an asset of yours...and with profits of €300,000, it should be a good business to sell.

I agree with Brendan about maintaining cash in the business. Beyond cash for cashflow purposes (the amount is for you to decide, we don't know what industry you are in), you should either put the excess into pensions or take it as income.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

If aiming to get more than 70k out of the company tax efficiently via pension, OP could also increase their salary to, say, 85k but pay 20% (17k) towards an AVC.

Tbh, you could probably increase salary all the way to 115k in order to max out the 100% company contribution limit, then put 23k in also as a personal contribution. 68k extra in their pension for the cost of tax/prsi/usc on an additional 22k income (115k -23k -70k).

 

[greener99]

From 2025, employer paid PRSA contributions will be restricted to 100% total emoluments, so if you get €70,000 from the company total, that is what you can put into a PRSA. While your pension is behind the curve, you should catch up putting €70,000 a year into it. You should also ensure that you are creating a business that can be sold in the future, it is an asset of yours...and with profits of €300,000, it should be a good business to sell.

I agree with Brendan about maintaining cash in the business. Beyond cash for cashflow purposes (the amount is for you to decide, we don't know what industry you are in), you should either put the excess into pensions or take it as income.


Steven

Hi Steven, thanks for the response. In terms of creating a business to sell, I’ve read about different options here. Is it a financial planner or tax specialist (or both) I would need to chat to? I’m ACA so I have shallow knowledge and I wouldn’t be confident our accountant knows enough. I’m planning to change once our accounts are finalised now that I’m sole owner.

 

[Steven Barrett]

Hi Steven, thanks for the response. In terms of creating a business to sell, I’ve read about different options here. Is it a financial planner or tax specialist (or both) I would need to chat to? I’m ACA so I have shallow knowledge and I wouldn’t be confident our accountant knows enough. I’m planning to change once our accounts are finalised now that I’m sole owner.

A financial planner primarily deals with personal finance so aren't qualified in dealing with selling businesses. While we know are retirement relief and Entrepreneur Relief, we don't have experience in the nuances involved in actually availing of these reliefs. If selling a business, don't skimp on advice, it could cost you a fortune if you get it wrong.

 

[greener99]

You should also ensure that you are creating a business that can be sold in the future

Hi Steven, thanks for the response. In terms of creating a business to sell, I’ve read about different options here. Is it a financial planner or tax specialist (or both) I would need to chat to? I’m ACA so I have shallow knowledge and I wouldn’t be confident our accountant knows enough. I’m planning to change once our accounts are finalised now that I’m sole owner.

When I asked who I should approach for advice, I assumed it was understood that I’m prepared to pay for their expertise. Thanks for the input

 

[Brendan Burgess]

If you are thinking of selling your business at some stage in the future, now is the right time to plan for it and it ties in well with changing your accountants.
Pick a medium sized firm of accountants who have a Corporate Finance division.

Or if you are in a specialist area, maybe ask a few others in the industry which accountants they use.

Brendan

 

[greener99]

As the company is so profitable, your bank should give you an overdraft facility which you could use as well in the event of a cash flow problem

I did this, thank you for the suggestion

Beyond cash for cashflow purposes (the amount is for you to decide, we don't know what industry you are in), you should either put the excess into pensions or take it as income

It is a retail business operating 3 locations at present. Two of the locations are struggling but one is quite strong (65% of overall business profit). I am considering buying the unit within which the strong business operates - I will have enough cash generated through profits by the end of the year.

It would be great for someone with experience in this to critique my thinking:

- I pay €25k in rent annually and having spoken to the landlord I can purchase this unit for €250k (as above, can pay cash)
- The business is debt free & well established (10+ years)
- It is in a rough location and it is likely the value of the unit will not increase
- There are no obvious alternative use for the profit in the meantime so the plan would be max the PRSA & pay the remainder as income

My current decision is to proceed to buy. I'm tentative because of the neighbourhood but I believe it will strengthen the sale potential of the business and also secure it from future uncertainty in rent increases (we have a rent review every 5 years and it cost me 15% 18 months ago).

Thanks for the advice

 

[Brendan Burgess]

I am considering buying the unit within which the strong business operates - I will have enough cash generated through profits by the end of the year.

"the company" and "I" are very different for tax and legal purposes.

If buying the premises is a good idea, then you should buy it in your own name and rent it to the company. The company should not buy it.

This is covered in lots of threads. But in summary, if your company owns the property, and you eventually sell the property, the company will pay CGT and you will pay CGT getting the profits out. If the company gets into financial difficulty or faces a big uninsured legal claim, the property will be available to the creditors. If you own the property in your own name, you insulate your wealth from the business to some extent.

 

[Brendan Burgess]

I believe it will strengthen the sale potential of the business

No, it will do the opposite.
Most potential buyers of the company will not want to fork out another €250k to buy the property. They will be happy to lease it from you.

They might even want to buy the business and relocate it.

If they want to buy the property, they can always buy it from you.

 

[Blackrock1]

Why?

I am no expert on relationships, but it would strike me that you are better keeping your business and your girlfriend/fiancée/wife separate if she has a full time job already. If she is driving 2 hours a day, it sounds like a fairly full-time job.

If your business needed a full time administrator and she were unemployed, it would be different.

Likewise I would not be messing about providing a temporary employee with a company car. It's the type of thing which Revenue would question and ask for justification.

Keep life simple. Keep things separate.

i tend to disagree with this, if i had a business i would certainly employ my partner, especially if she has the skills to help. When / if you have kids having the flexibility will be a great bonus as is the ability to fund 2 pensions to the max thereshold.

 

[greener99]

"the company" and "I" are very different for tax and legal purposes.

Yes - I should have been clearer. I meant to get the business to buy the unit. I have read a lot of other threads saying owning property through a business isn't advisable but I wasn't sure if that meant general or if there was a change for the property I operate in. That's clear now.

If buying the premises is a good idea, then you should buy it in your own name and rent it to the company. The company should not buy it.

This is covered in lots of threads. But in summary, if your company owns the property, and you eventually sell the property, the company will pay CGT and you will pay CGT getting the profits out. If the company gets into financial difficulty or faces a big uninsured legal claim, the property will be available to the creditors. If you own the property in your own name, you insulate your wealth from the business to some extent.

Yes - makes sense. Thank you