Should I incorporate my business?

Newsletter issue - December 2019.

As things currently stand, the expected cut in the main rate of corporation tax to 17% from April 2020 is unlikely to happen, but current corporation tax rates remain pretty favourable. There are also other areas where company formation may help save tax.

The costs and regulations involved with running a company are usually greater than trading as a sole trader or in partnership, and should not be overlooked. In addition, incorporation generally means an increase in administration, which some businesses may find burdensome.

The starting point for dealing with companies and company directors is to remember that a limited company exists in its own right, which means that the company's finances are separate from the personal finances of the company owners. Strict laws mean that the shareholders cannot simply take money out of the company whenever they feel like it.

The question of whether to incorporate commonly arises as a business expands - the limited liability status that company formation provides is often needed to start winning contracts with bigger companies. However, incorporating may not be such a good deal in the early days of trade, or if there is no intention to grow beyond the status of a solely owned business. This may be particularly relevant if losses are envisaged in the early years of trading - it is possible to carry back losses made in the first four years and offset them, where applicable, against personal income of the three preceding years. This often results in a substantial refund of tax becoming due and may offer a much-needed cash boost to the business.

Although there are disadvantages to incorporating a business, the lower tax rates and other reliefs currently on offer still make it an attractive proposition. Some advantages worth considering include:

Ability to pay dividends to shareholders
Flexible succession planning, particularly for inheritance tax purposes
Greater investment opportunities, for example potential to raise money through tax-efficient schemes such as the Enterprise Investment Scheme (EIS)
Limited liability status for shareholders, although directors may be asked to give personal guarantees of loans for the company
Potential increased saleability

It might be worthwhile revisiting the question of incorporation on a regular basis, and making the jump, where relevant, at the most appropriate time.