Q: Ross Burnett: I am establishing an online merchandising business while working full-time and part-time. My company is already registered, officially I haven't started trading yet. What are the advantages to a Look-Through Company (LTC)? Will it make my tax position better?
A: Ross, so you are starting a business and want to know how to structure the company you intend to trade through, for tax purposes.
To answer this question I need to make some key assumptions.
• You are on the higher tax bracket (given you are working part-time and full-time already),
• You expect the online merchandising business to make a profit, and
• You want to minimise your tax bill,
• You are the sole shareholder in your company.
One of the key points to trading in a company is to limit your liability from potential creditors. Remember when you start to make a profit, the IRD becomes one of your creditors, or someone to whom you owe money. Until you make a profit they are not a creditor, in the sense that you don't owe them any income tax if you are making losses. In fact the losses made will carry forward to offset against future profits, thus reducing the tax you might need to pay in the future.
The company tax rate is 28 cents in the dollar. If you are on the higher personal tax rate, you are paying 33 cents in the dollar. If you elect to make a an LTC, the company remains a standard limited liability company but it has elected for the income from the company to flow out to the shareholders where it will be taxed at their personal tax rates.
This is all well and good if the company is making a loss, as it allows you to get a tax refund for the amount of the company loss. For example: if it made a loss of $10,000 p.a., you would get a tax refund of $3,333. This tax refund proves valuable to business owners who are essentially funding the loss out of their own back pocket. So any form a cash respite is appreciated.