The question of whether to incorporate is one I’ve discussed with many clients over the years. Whilst sometimes the answer is a very clear yes or no, it’s when we get into “maybe” territory that things can become trickier.

Although tax is often the first thing that comes to mind when contemplating incorporation, and it is an important matter, there are a lot of other commercial considerations that should form part of the incorporation decision:

Risk

One of the aspects I often start with is risk. If there’s a potential disaster scenario where there could be a chance of a big loss, the benefit of operating through a limited liability company should be seriously considered. A company is of course a separate legal person, and as such if operated properly can ringfence your personal assets from the business. This could on its own dictate the answer to the question.

Privacy

Next, there is the issue of privacy. If you operate as a sole trader or unlimited partnership, your accounts that show how your business has performed are largely kept between yourself and HM Revenue and Customs, unless you choose to share them. When you are a limited company, your accounts are filed at Companies House. This isn’t a massive issue for many smaller businesses because it’s generally just the balance sheet that is filed, but there is a certain amount of information that can be assumed from the movement in the balance sheet year on year that will be in the public domain if you incorporate.

Practicalities

Don’t dismiss the practical issues that will need to be dealt with. For example, you might have a lot of contracts that will need moving, or if you have property then there could be conveyancing costs (as well as tax).

Credibility and succession

One advantage of operating through a company can be the associated credibility that comes with your business being registered at Companies House and the public having access to the accounts/director names etc. This can potentially make succession a little easier; if a sole trader dies then their business ceases, someone else might take it up, but essentially, they are starting again. If a company shareholder dies, then the business within the company remains intact (obviously, it may need help if that person was key to the running of the business), all contracts would generally remain in place, and the day-to-day operations could continue. It’s simply the share ownership that would change.

Tax

There are of course important tax matters to deliberate too. One misunderstanding that I have encountered many times over the years comes from the assumption that if income tax is 20/40/45% and National Insurance is 9/2% but corporation tax is 19%, then it’s obvious that operating as a company is the answer. Corporation tax may be 19% but the cash belongs to the company so, to benefit from it personally, you need to declare dividends which can be taxed at up to 38.1%. Then there is the fact that corporation tax is due to rise to 25% in 2023, albeit smaller businesses with profits of less than £250k will on the whole pay a lower rate.

The bigger picture

Something else that I encourage clients to factor into incorporation deliberations is thinking about the bigger picture and the longer-term; what is the five or ten-year plan for the business? Spending some time on this is really important when you’re considering a big change like incorporation because if the plan is to cease trading in a year or two, it might not be worthwhile going through with the incorporation at all, but if you plan to be in business for longer, it could well be beneficial.

How we can help

As I mentioned at the start, incorporation is sometimes a clearly favourable option, but sometimes it’s not as clear-cut. We can help you balance up the pros and cons and then take a view, we are happy to talk through your incorporation options and help you make the right choice for you. Tax is important, but as the old saying goes, don’t let the tax tail wag the commercial dog!

If you would like to talk about incorporating your business, please contact Kate Naylor for an initial chat.

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Kate Naylor
Kate Naylor

Tax Partner

Kate works with businesses and their owners on tax strategies and mitigation, looking at business and personal tax structures to achieve long term goals.

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