Business owners should review the structure of their business at key stages in its lifecycle. A structure which suits a new business (e.g. a sole trader) may not be appropriate when the business matures and requires external funding.
In this paper we will look at the decision to incorporate a business as a limited company (sometimes called ‘go limited’).
The choice of business structure will affect the level and timing of tax payments, as well as the availability of tax reliefs. Using a limited company can reduce the total tax and national insurance payable by a business and its owners, compared to the total payable when trading as a sole trader (unincorporated business). However the methods used to extract value from the company will have a significant effect on the tax liabilities of the business owners.
Non-tax issues can be as important as the tax savings for many businesses, as those non-tax issues will involve costs and obligations for the business owner.
Matters to consider may include:
- The expectations of customers. In certain sectors all suppliers are expected to trade as limited companies.
- The number of people involved in the business. Where two or more people are involved, a partnership or company will be needed. In which case the administrative costs of running a partnership should be compared to those incurred by a limited company.
- The need to raise finance. Investors and lenders will usually be unwilling to invest in or lend to an unincorporated business.
- The flexibility required. The share structure of a limited company permits fractions of the business to be transferred easily and to be held by investors who may not be actively involved in the day-to-day management.
- The need to protect personal assets of the business owners. A limited company or LLP will provide some protection from creditors for the personal assets of the business owners.
- Administrative costs. A company has more filing obligations and will require more administration, incurring higher costs than an unincorporated business.
Tax savings can be made by operating as a limited company, as opposed to an unincorporated business, at most profit levels but a careful calculation based on the owners’ individual circumstances is required.
At Guilford Accounting we subscribe to software from Taxpert which has an ‘Incorporation Calculator’ and partner with TaxCalc, (who provide our corporation tax filing software) and who have produced an excellent summary of the ‘incorporation decision’. You can get a complimentary copy here.