Is Now the Time to Incorporate?

Recent figures released by Companies House show a sharp increase in company formations.  As well as an indicator of increased business activity, the distinct tax and legal advantages of a company continue to be attractive to entrepreneurs. But is now the time for you to incorporate your business? The 2 key factors you need to consider are tax planning and limited liability.

Tax Planning

Companies pay corporation tax on their profits - the 2011 Budget reduced the main corporation tax rate to 26% (with further annual reductions to 23%) and the small companies rate to 20% - whereas the owners of unincorporated businesses, sole traders and partnerships, pay personal income tax at their marginal rate (now 50% on taxable profits over £150,000).  The continuing reductions in corporation tax rates - when compared to the continued presence of the 50% income tax rate (and other changes to thresholds and allowances) should give owners of unincorporated businesses serious food for thought that it may be beneficial to incorporate as a limited company.  Companies are very useful where the profits are higher than the owners need to live on as the "surplus" profits can be sheltered to take advantage of the preferential corporation tax rates.  The owners of unincorporated businesses will continue to pay personal income tax at their marginal rate, whether they use them to live on or not.  Also, companies still offer the opportunity to pay minimal salaries and maximum dividends, thereby reducing the NIC burden.

Limited Personal Liability

Since its inception in Victorian times, the company remains the most popular business structure.  This is because the company is a separate legal person - as distinct from its owners - and is solely liable for debts and liabilities it incurs in its own name.  This means that the company's directors and shareholders are not personally liable for the company's debts and liabilities (save in certain cases of fraud or insolvency).  By contrast, the owners of unincorporated businesses are personally liable for the debts and liabilities incurred by their businesses - they do not have the protection of limited liability. 

What Action Should you Take?

Prior to making any decision to incorporate, a business will need to take detailed legal and tax planning advice to ascertain whether the step to incorporate will be advantageous to them. 

 

Please contact  Simon Porter, Head of the Corporate & Commercial Department, for further information - he can also direct you to our accountant contacts who can assess the tax savings for you.