Should I Incorporate my business?

What does incorporation mean?

Most people when starting up a new business, begin as a sole trader as this is the simplest form of trading with the minimum amount of administration required. Incorporation means that a new or an existing business will register as a limited company, creating a new legal entity which has its own identity and becomes distinct from those who own and run it.

The advantages of incorporating a business

1. Financial Protection
The greatest advantage of incorporating your business, as stated above, is that it becomes a separate legal entity and therefore provides greater distinction between the business and you personally. Put simply, a limited company provides limitation on the liability you face if the business was to be sued or fail, limited to the amount you have invested in the company. I.e. you would not lose personal assets such as your house to cover any outstanding debts.

2. Acquisition or Disposal
Any merger or acquisition activity is made easier with the transfer of shares, rather than selling or acquiring parts of the trade and assets of an unincorporated business.

3. Funding
Obtaining funding, such as bank borrowings etc. can be easier and less risky for a separate legal entity than for a sole trader.

4. Remuneration
On a personal level, as an employee of a company, you can be paid a salary and pension contribution which can be a tax-deductible expense of the company.

5. Tax
A limited company pays Corporation Tax on profits, rather than Income Tax payable by the individual and the rates used are different. Which will make the owner of the business better off, will depend on various factors, such as other income streams and assets and therefore would need to be considered on a case-by-case scenario. However, historically it was considered the tax rates for a company made incorporation advantageous, this may be marginal or even reversed now as rates change.

6. Distributions
Linked to the above, as a company director, you can decide when profits are distributed, which again can provide certain tax advantages.

7. Trading Relationships
Often suppliers and customers would rather deal with a limited company, as this provides them with more certainty as well as access to more public information. This may result in better rates being negotiated in trade agreements.

The disadvantages of incorporating a business

8. Greater Responsibilities
With setting up a new legal entity comes certain legal responsibilities. Companies House requires filing of certain information, and failure to do so can result in penalties, disqualification, or even criminal prosecution.

9. Additional fees
Due to the additional administration of an incorporated business, this will result in higher professional fees. However, some of this may be offset by the tax savings.

10. Public information
Due to the filing responsibilities of a limited company, there will be more information regarding your business in the public domain, which some people may oppose.

Next steps

If this is something that you’re thinking about or would like to find out more, then please get in touch with Farnell Clarke and we can discuss your business, objectives and explain the process and the costs involved further.