When we meet new clients who have a business idea and want to go into business on their own account we often find that the first thing they want to do is to become a company director! They have usually decided they want to have a company before they have met up with an accountant. Therefore our first meeting will often be a lengthy discussion about business structures; incorporation, sole trade or partnership.
There are no strict rules which dictate that a new business should choose any one of these structures. It very much depends on them, the industry they are in, their personal circumstances as well as business and tax issues.
What are some of the pros and cons of Incorporation?
PROs – for Incorporation
- It should provide limited liability. This means that the personal liability of directors/shareholders is limited to their investment in the company. (However this limited liability can be eroded by directors/shareholders giving personal guarantees on behalf of the company.)
- There are definite tax advantages to running your business through a limited company. (However, to quote an old maxim, “Don’t let the tax tail wag the business dog”. They may be sound non-tax reasons for being a sole trader which outweigh tax benefits of incorporation.)
- A limited company can allow directors/shareholder to maximise the use of personal allowances and lower tax rates in comparison to those they might suffer in a sole trade.
- There is scope to pay less National Insurance.
CONs – against Incorporation
- New businesses often make losses in their earlier years. A sole trader has considerable flexibility dealing with such losses.
- The administrative and accounting burden is greater for a limited company and thus the annual costs for accountancy, taxation and company secretarial are likely to be higher than the costs of accounting and tax compliance for a sole trader or a partnership.
- Company cars are an expensive taxable Benefit In Kind whereas running a car through a sole trade or a partnership causes considerably less tax anguish.
- Similarly private expenditure made by a limited company on behalf of a director or shareholder can lead to taxable Benefits In Kind and also have National Insurance repercussions.
I still think the company life is for me
Each new business is unique. Come and speak to us and we will talk through the pros and cons of a suitable trading structure both from a tax and accountancy point of view and also from a commercial one. In certain markets incorporation is the norm and in others sole trader status is fine.
We have great experience in this area and are happy to discuss the particular requirements you might have. The first meeting is always free and gives us and potential clients a chance to look forward to what may become a fruitful and long term relationship. Give me a call on 01788 577613, or drop me an email on firstname.lastname@example.org