SHOULD I INCORPORATE MY BUSINESS?

This is a more sophisticated decision than just: which is the one where I’ll pay less tax?
Tax advantages of incorporation are not as clear or available as they used to be. Incorporation often takes into account other parameters and opinions, which I list below.

There is no “RIGHT” or “WRONG” way to trade. You can start – and remain – as a sole trader or a company, at your own preference.

Feel free to contact me if you’d like to talk through the best route for your business.

PRO:

– vanity! some people love the Limited status.

– there may be a need to keep company business ringfenced from other personal income/business.

– it can offer a more professional persona to offer clients / financial institutions etc.

– there can be less tax paid overall. Corporation Tax on profits PLUS personal tax on dividends withdrawn by the Director may = less than a higher rate Income Tax.

– cashflow can be more flexible: the timing of dividends can influence the timing of personal tax payments.

– your financial liability is restricted to the amount of money you put into the company i.e. the shares.

– you can offer a legal stake in your business to others by issuing more shares.

– you can offer shareholdings with different rights, for different investors.

– there’s one Corporation Tax payment a year rather than two Income Tax instalments, plus a longer lead time to pay.

– you can still utilise your Personal Allowance with your dividend income, and other savings income.

– you have flexibility in how to deal with the company’s profit i.e. withdraw it as salary and/or dividends, and/or leave it in the company for future investment.

– salaries (including one to yourself) can be deducted from company profits.

– most clients you offer services to will pay a limited company’s invoices gross, rather than deducting any payroll tax at source.

CON:

– extra paperwork. There are statutory, mandatory returns for a company in addition to tax returns, with penalties if you let them lapse. Nor can you quickly stop using a company if you, for example, go into full time employment elsewhere.

– your financial liability is restricted, but you have additional statutory responsibility as a Director to trade legitimately and without negligence.

– a set of company accounts plus a Corporation Tax return can be more complex than just a self-assessment return. And as a director, you will have to complete a SA return as well.

– your trade must always be carried out in the company’s name e.g. a probable change of paperwork for your invoices/quotes.

– you need to keep excellent company records, with a separate bank account.

– you cannot utilise your Personal Allowance against corporate profits. You will be taxed on the first £1 you earn in the company.

– you need to take on board that the company is a legal body in its own right, and there are rules on how to treat its transactions. For example, you cannot just use its assets for your own purposes, you cannot just draw money out as you earn it, at least not without considering it from the tax/legal perspective first.

– drawing out too much from your company – i.e. leaving it with an amount owed BY the director at its year end – is illegal in certain circumstances.

– salary can be deducted from company profits, but if these are paid at over the Lower Earnings Limit* for any employee (including you as Director), a PAYE/NI system must be set up by the company, which requires will require monthly and annual returns to HMRC.
*This is £6,240 or £120/week for the tax year 2020/2021.

– the company’s basic details are available to the public at Companies House: this includes the Directors’ names (though not their home addresses), and brief year-end financial information.

Copyright / quidsandquills.com / 2019