There are many important decisions to make when you own a business, and deciding on your structure is one of them. If you already run a business as a sole trader, there may come a time when you’ll consider incorporating your business. Or, if you’re in the early stages of your career, you’ll have to make this choice when building your business plan.

Incorporation has several benefits for business owners – the tax advantages alone are a big draw for most. But that doesn’t mean it’s without its drawbacks, so here’s everything you need to know about incorporating your business.

What is incorporation?

Incorporation is the process of turning a new or existing business into a limited company.

You can incorporate your business by registering it with Companies House. Registering takes time, but we can do it all for you, so you won’t need to lift a finger.

You’ll have to decide on your company’s name before it becomes part of the register (which is readily available to the public).

Once registered with Companies House, you’ll also have to make sure you’re signed up to pay corporation tax with HMRC.

Admittedly, there are a few extra hoops to jump through if you decide to incorporate, but let’s look at the benefits first.

Pros of incorporating your business

First and foremost, many business owners choose to incorporate their business for tax purposes.

By turning your business into a limited company, you’ll have to pay corporation tax on your profits rather than income tax like a sole trader would.

As corporation tax is currently at 19% (25% for companies with profits above £250,000 from April 2023), your company may be able to keep more of its money than a sole trader would; sole traders pay up to 45% income tax on profits that exceed £150,000 a year (£125,140 from April).

Company directors can go one step further and pay themselves with a mix of salary and dividends. You’ll mitigate any income tax by paying yourself under the personal allowance of £12,570 a year.

You can then top this up with dividends which HMRC taxes at a lower rate than income tax. Get it right, and you might be able to pay yourself the same pre-tax wage as a sole trader but keep more than them after taxes.

Furthermore, by becoming a limited company, you’ll have the added protection of limited liability – the separation of yourself as a legal entity from your business.

Sole traders, on the other hand, are legally and financially responsible for their business. If their business makes a loss or incurs debt, they’ll be responsible for settling these issues.

But as a company director with limited liability, your personal assets will most likely be protected beyond what you personally invested in the business.

Cons of incorporating your business

While becoming a limited company sounds like the easiest and best option, it doesn’t come without its difficulties.

One of the most impactful changes will be the amount of administrative paperwork you’ll have to take on. For instance, you’ll have to file statutory accounts with Companies House every year; prepare forms for submission; maintain statutory registers; prepare shareholder documents, and much more. To help mitigate the strain of the extra work, we offer our clients company secretarial services to ensure they don’t get weighed down.

If you wish to run your business with a level of privacy, incorporating may not be the option for you. As you’ll be on the company’s register, your company’s financial information will be readily available to the public.

Furthermore, setting up a limited company may mean you have to relinquish a certain amount of control; if you have fellow directors and shareholders, you won’t be able to make any significant decisions without their approval. Many people decide to get into business to be their own boss, but with incorporation, you may have to share the reins.

Make an informed decision

You may still be asking yourself whether incorporation is the right thing for you and your business. While this article covers some of the main pros and cons, it always helps to have a more in-depth discussion of your options.

We’ll happily sit down with you and look over the benefits or drawbacks of setting up a limited company so that you can make informed decisions in your best interests.

Talk to us about our company formation services.


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