Incorporate or not to incorporate… that is the question.

The question of what structure a client should trade as comes up again and again –

both with start-ups and businesses already in existence.

There are many different structures available such as sole traders, partnerships, limited companies,

LLPs, charities, CICs, CIOs and CASCs.

Choosing the right structure is a critical decision as it affects many areas including taxes, personal liability and ability to raise funds.

Firstly – what does incorporation mean?

Incorporation is the process of forming a legal entity which separate from its owners. Once incorporated, the business has its own rights and responsibilities under the law, including the ability to own property, enter contracts, and be taxed separately from its owners.

Pros of incorporating your business

1. Limited liability protection

Incorporation shields your personal assets from the liabilities and debts of the business. For instance, if your company incurs debt or faces a legal action, creditors typically cannot pursue your personal savings, property, or investments (although it must be commented upon that this is not always the case!)

2. Tax benefits

Corporations offer unique tax advantages:

• Salary or dividends – Shareholders who are also employees can pay themselves a combination of salary and dividends to optimise taxes.
• Deductions for corporation tax – Corporations can deduct business expenses like health benefits and pension payments.
• Lower Tax Rates – Depending on the profits of the business, the corporation tax rates may be lower than personal income tax rates.

3. Easier access to capital

Incorporation makes it easier to attract investors and raise capital. Corporations can issue shares to secure funds, whereas sole traders and partnerships typically rely on personal or private loans.

4. Continuation after sale or death

A corporation continues to exist even if the original owner leaves or passes away. This can be beneficial for succession planning and ensures business continuity.

Cons of incorporating your business

1. Costs of incorporation and ongoing costs

Incorporating comes with initial setup fees and ongoing admin expenses such as annual accounts and other filings. This can be a significant difference, especially for small businesses.

2. Complex reporting

Companies face more complicated tax reporting than sole traders or partnerships. It is likely an accountant will need to be more involved to help the more complex tax rules in relation to drafting accounts.

3. Double taxation

One of the hardest things to explain to clients is the feeling of ‘double taxation’. Where profits are taxed under the corporation tax rules and again when distributed to shareholders as dividends. It is hopeful that the overall tax paid is lower when compared to the tax and NI paid as a sole trader but good planning is need to ensure this is the case.

4. Increased visibility

If a business is incorporated, the accounts are filed to Companies House – albeit a reduced version if the company is considered Micro. In addition to this, the shareholders and directors of the company are also available to view on public record giving less privacy.

So how to determine if incorporation is the right path for your business?

1. Assess Risk – If your business involves high debts or legal risk then incorporation may protect your personal assets.
2. Consider Taxes – Consult an accountant to assess which structure is the most tax efficient
3. Consider goals and objectives of the business – If you plan to raise capital then incorporation could be more attractive to investors.
4. Weigh Costs: Balance the setup and administrative costs against the potential benefits of incorporation.

If you need advice in this area then feel free to contact us – info@dominichill.co.uk or 01323 649 509