Whether you’re starting your first business or looking to change your structure, you may ask: “What are the benefits of incorporating”?
If you decide incorporation is the best choice for you, you’ll have to start by registering with Companies House.
While this can be a reasonably long process (largely due to the extra admin work), it’s just one slight hitch in what could otherwise be a very beneficial business decision.
“What are these benefits?” you may ask. Well, in this article, we’ll explain the main ones that could pique your interest.
When you incorporate your business, you’ll separate yourself from it and become your own ‘legal entity’.. That might sound strange, so think of it like this: sole traders are the business. But the owner of a company is not the company. They are two separate legal entities.
This means that, unlike a sole trader, you’re less liable should the company fall into debt or suffer losses. If you ran your business as a sole trader and suffered a substantial financial loss, your personal finances could take a hit. Whereas, with a limited company, you’ll only be liable to pay for a loss equal to your investment rather than the whole value of its debts.
As a director of your limited company, you’ll be able to find ways to pay yourself legally while minimising your tax liability to HMRC.
You can do this by paying yourself through a mix of salary and dividends. Rather than putting yourself in a higher income tax band, you can take a salary under the personal allowance of £12,570 and top it up with dividends, which have lower tax rates. The best part is – it’s completely legal.
You’ll also find it much easier to pay towards a pension as you’ll technically be an employee of the company, meaning your contributions can be deducted from your corporation tax to leave you with a smaller bill.
As a company, you’ll have to pay corporation tax rather than income tax as a sole trader would. Although the Government has increased corporation tax for certain companies to a main rate of 25%, this is still lower than income tax rates.
However, sole traders have a tax-free allowance of £12,570 a year, so corporation tax usually only beats income tax if you’re making a lot of money a year.
You will also have to complete a corporate tax return if you incorporate your business, which can take much more legwork than your average self-assessment tax.
It can sometimes be stressful to make all the critical business decisions you face on your own. When operating as a sole trader, the onus is on you to carve out the best path to success. But, as a limited company, you may have several shareholders to share the weight with.
Granted, this will mean that you’ll have less of a say as everything will have to be agreed upon, but that could benefit you if you encounter any difficult choices. Think of your shareholders as a sounding board — if an opportunity arises, you’ll be able to table it and come to a shared resolution.
There’s always more to discuss
Although there are a myriad of benefits to incorporating your business, it isn’t without its downsides. Before making any big decision for your company’s future, it’s important to understand the highs and the lows.
We’ve helped many clients through the incorporation process, so we know the benefits and drawbacks of starting a company. As a trusted partner, we think you should have all the information before diving in.
Get in touch to discuss incorporating your business.