One of the most frequently asked questions we are asked is “What is the most suitable structure for my business”. Here Partner Ashley Phillips explains some of the tax advantages and other implications you need to consider when deciding on the structure of your business.
What you need to know
When considering whether to incorporate their business most people focus on the potential tax position of each option. In our view, based on current tax legislation, there are tax advantages to operating your business through a limited company and there is greater opportunity for income tax planning. However, before considering the tax advantages it is important to understand and consider all of the financial and non-financial consequences of incorporating your business, the main ones being as follows:
Limited companies have greater reporting requirements than sole traders or partnerships in terms of accounts and therefore part of your tax savings will be taken up by increased professional fees.
If you have no other employees then maximising the tax benefits of operating through a limited company would mean setting up and operating a payroll scheme. Again this will lead to increased professional fees.
If you have any bank borrowing then it is likely that your bank would charge a higher interest rate to your limited company than to you as an individual, or require personal guarantees to be put in place.
Incorporating your business, if you have already been trading, may involve the transfer of assets, including goodwill, into the business which could create a substantial capital gain. There are potential ways of deferring the gain until the company is sold and any loan to the company created as a result of the transfer can be used as part of effective tax planning, however particular care should be taken when the incorporation involves the transfer of property.
The most important thing for limited company owner-managers to understand is that the company’s money is not their own personal money. Using company money for personal expenditure and/or extracting money from the company comes with tax implications, therefore it is important to plan remuneration and profit extraction in the most tax-effective manner.
Incorporating your business may bring a number of one-off administrative tasks such as setting up new bank accounts, informing customers and suppliers of your new trading status and new bank details, amending your sales invoices and other documents to the company name.
A limited company is a separate legal entity and therefore, subject to having sufficient Directors in position, enables business continuity in the event of the death of one of the owners.
A company usually provides limited liability, therefore it offers greater protection of your personal assets.
Some business sectors, customers or suppliers consider limited companies to be more credible than unincorporated businesses and therefore operating through a limited company may increase the opportunity to trade with those businesses.
Limited company accounts, as well as details of Directors, are filed at Companies House. This information is now free to the public meaning that a limited company does not offer the privacy currently enjoyed by someone operating through an unincorporated business.
Once you understand the overall consequences of operating through a limited company you can make a decision as to whether the tax savings and other advantages are sufficient to cover any disadvantages.
Our Mobile App can help
You can obtain an idea of the potential tax savings for operating your sole trader business/partnership through a limited company by using the ‘Should I incorporate’ calculator, one of the numerous tools available on our firm’s App. You can find our more details of our App including download links here.
If you feel that incorporating your business would be beneficial then please contact your local McCabe Ford Williams office to discuss how we can help you.