SHOULD YOU INCORPORATE YOUR BUSINESS?
Deciding what type of business to set up can seem like a complicated issue. Fortunately, we love this stuff, so to help you decide we have listed some of the key factors to consider below.
It used to be the case that the move to incorporate your business would save you tax. But recent changes to dividend taxes mean that, on a straight comparison, a sole trader earning more than around £150,000 will pay less tax than a company.
But higher sales and profits generally bring higher risks, which is when the protection of limited liability offered by incorporation becomes even more important. Despite your best efforts, things can go wrong. A major customer goes bust leaving you seriously out of pocket, you get sued for breach of copyright, shit happens – and the bigger the business the more you have at stake.
As a sole trader, everything you own can be on the line – that’s all your assets including your house. A company is a separate legal entity from its directors and shareholders, which protects your personal assets from any disasters in the business.
Of course, a director has duties and failing to act responsibly can leave you liable for the company’s debts.
But back to taxes, although the benefits of running your business through a company have been eroded by recent changes, there are still advantages in terms of flexibility and incentives.
A company pays tax on its profits. But shareholders only pay tax on what they take out of the business. Leaving profits in the company enables you to defer paying personal tax. This can be especially useful if your profits fluctuate or if you want to take a sabbatical.
You can give shares to your loved ones. Everyone gets £5,000 of tax-free dividends per year. If you’re paying higher rate tax and your spouse has no other dividend income, that would save £1,625 in tax every year. The tax-free amount is being cut to £2,000 per year from April 2018 but there’s still scope for saving tax. We can illustrate the options for your specific circumstances.
Some tax incentives (R&D Tax Credits, for example, and Film Tax Relief) are only available to companies.
And what’s more…
Another reason to incorporate your business is that a company is better placed to attract investment. You can’t sell shares in a sole trader business (that would make it a partnership). Not only can a company easily issue shares to investors, it can offer them tax incentives, through the Enterprise Investment Scheme (EIS) and Seed EIS. You can also offer different classes of shares, for example shares with no voting rights, allowing you to keep control of key decisions.
And when it comes to selling the business, it’s much easier to sell shares in a company than the collection of assets and liabilities that make up a sole trader business. And more flexible, as you don’t necessarily have to sell all the shares at once.
Something else to consider is image. A company seems bigger than an individual and unless you are selling a highly personal service that only you can deliver, a company projects a more substantial and professional image and might also make it easier to transition to becoming a growth business (where you step back from doing everything yourself).
These are the main areas of difference, but there are other, more subtle differences and deciding when is the best time to incorporate your business varies, so if you are considering it or if this has made you think, just drop us a line and we will be happy to go through your best options.