Should I Incorporate My Business into a Limited Company?

When you first start out in business it’s usually as a sole trader. Then you find sales really taking off and before you know it – usually within two to three years – you’ve hit that £40,000 plus profits mark. And you really could do with another pair of hands in the business – or even three pairs. It’s at this point that you should be considering switching from a sole trader to a limited company.

Why? Because, quite bluntly, it makes perfect sense in tax terms. Instead of paying the higher rate income tax band of 20 per cent you can pay corporate tax at 19 per cent instead. Unless, that is, your company earns £250,000 annually and then you’ll pay 25 per cent corporation tax. Even so, this is still much less that additional rate of income tax, which is 45 per cent tax for profits more than £125,140.

Another reason for setting up a limited company is that it’s the best way to take on a co-director. You might also find that larger companies will only work with a limited company or an umbrella company – rather than a sole trader. That’s because they don’t have to handle the tax and admin side.

But there are, of course, other reasoning involved and actually, going from a sole trader into a limited company isn’t for everyone. That’s because, for starters, the new structure means you may have to seek consensus for major business decisions. That, in turn, can slow down business. Limited liability companies are the most popular form of business structure in the UK at this moment in time. So, if you’re considering this move, or want to know more about it, then read on. One of the areas we look at in this article is the pros and cons of incorporation which, we hope, will help you make a better-informed decision on the matter:

What does ‘incorporate’ mean?

By ‘incorporate’ we mean registering your business, as a limited company, with Companies House. The name of your company, it is directors and when it was formed etc will be made public record. Your tax accounts for the year are also updated and made public.

Pros of incorporating your business

• Tax savings. In addition to saving with corporation tax, a company director can pay him or herself in dividends and a salary. If your salary is less than the current personal allowance (ie what you can earn without paying tax) of £12,570 a year and the rest is in dividends then you won’t pay income tax at all. You will pay tax on the dividends but it’s not much in comparison.
• Limited liability. With a limited company your business finances are separate from your personal fortune. That means if your business goes under you won’t be obliged to sell your home and other personal assets, such as a car, to pay off your creditors. Neither will your credit rating be affected. In other words, you have a ‘limited liability.’ That’s not the case with a sole trader, whose business and personal finances are inextricably linked.
• Pension savings. As a ‘company employee’ (ie director), it’s possible to write off your pension payments as tax-deductible expenses.
• Selling on. Being a shareholder of a limited company makes it much easier to sell the business when you want to retire or move on.
• Director status. When you become the director of a successful business you develop a certain self-image. And that’s not a bad one to have!

Cons of incorporating your business

• Increased admin. As well as filing your accounts with Companies House on an annual basis, as a limited company you will also be obliged to get forms ready for submission; maintain statutory registers and provide shareholder documents etc. Failure to do so in time can have severe financial repercussions or, in the worst-case scenario, can lead to a jail sentence.
• Complicated decision-making. When you have other directors and shareholders, you can’t make all the big decisions yourselves; it has to be a joint affair. This can slow business down and it also takes away your own autonomy.
• Public property. When you file with Companies House your accounts are online for all to see – whether you like it or not. That includes how much profit or loss you made and which directors you took on that year or who, at director-level, resigned etc.
• Bigger accountant bill. The more complicated your accounts (ie additional form filling etc) then the more you’ll pay for your accountant. Having said that, a good accountant will easily pay for him or herself by saving you more money in the long-run.

How to incorporate your business

To set up as a limited company you’ll need a name (check it hasn’t already been taken by someone else) and an address. In fact, having a registered office address is a legal requirement. It could be your home address or even that of your accountant.

There must also be at least one director and one shareholder. You will also require a four-digit code – Standard Industrial Classification (SIC) – to identify the type of business you fall in to. 

Next, it’s time to register with Companies House. Once you’ve done this they’ll send you a ‘certificate of incorporation’ and on which you’ll see your company number. If you’ve registered online you will automatically be signed up to pay Corporation Tax. If your incorporation was via post then you’ll have to remember to sign up for Corporation Tax within three months.

Contact us today

Not sure whether incorporating into a limited company is the sensible option for you? Then call us for advice today on 0800 140 4644. You can also drop our team a message via our Contact Us page.