As a business owner, you’ve put a lot of time and effort into setting up and launching your company. At the time, incorporating your business and becoming a limited company might have been an attractive option: Separation of your personal and business finances, dividends, tax benefits – the many perks may have been appealing to you.

But now it’s time to evaluate where you stand, and with the large majority of businesses in the UK being limited companies, partnerships and sole traders, questions are often asked about business incorporation, it’s advantages and disadvantages.

As specialists in helping business owners, we’ve put together the answers to the question of whether or not it is still the best way of trading for you.

The difference between a limited company and sole trader

Incorporating your business means you are effectively creating an organisation that will run the company, which creates separation between your own finances and those that belong to the business.

This also means that the profits of the company would be subject to corporation tax, and as the owner of the company, you would only be taxed on the income you take from it, such as dividends and salaries.

Unincorporated businesses, such as sole traders and partnerships, function differently. They are seen to be the possession of the business owner and so you would be taxed on the full profits of the business. Similarly, business partners in a partnership will share responsibility for both the business as well as its profits, though they would be taxed separately.

In order for a business owner to determine if incorporation is still their best method of trading, we recommend considering the following:

Corporation Tax vs. Income Tax

As the owner of a limited company, you’ll be no stranger to paying corporation tax. Your busy is ticking over nicely, you’re paying tax on your dividend payments that you’ve drawn out and paid to shareholders, but you’re still constantly fearing that time of year when your corporation tax is due.

But there is another option. If you decided instead to become a sole trader or partnership, you would instead face paying income tax and national insurance on any profits you receive. However, NIC and Income Tax rates are currently much higher than the company tax rates, so in some cases it might be cost effective to remain incorporated.

Tax Planning – Are you set for the future?

When running your limited company, it can often seem appealing to withdraw your company profits, but we see business owners stopping themselves out of the fear of a massive tax bill.

But if you’ve paid your corporation tax, then remuneration planning could be an attractive option. This would allow you to pay your dividends directly to yourself as a shareholder or business owner. As dividend taxation is a complicated subject, we’ve published a blog post on these changes and its impact on company owners.

This is just one of many tax savings available for incorporated businesses, and if you’re determined to reinvest your profits back into your business to fund future growth, you have significantly more options for tax planning than an unincorporated business.

Have you considered your liability and credibility?

As a director or shareholder of an incorporated business, you are liable for any debts that are outstanding on your purchased shares. This effectively means your personal assets would not be at risk if your business was struggling with debt, unless the director had loaned money to the company that the company cannot subsequently afford to pay back.

That being said, if you are knowingly taking on debts that your company cannot pay, you are ultimately putting yourself at risk of legal action against individuals and a charge of fraudulent trading. Similarly, an increasing number of banks and creditors are beginning to not provide funding without guarantees in place, in order to prevent business loans from not being secured against a director’s personal assets.

However, the nature of being an incorporated business often means that finance providers are more willing to deal with them, largely due to the idea of their predictable cash flow.

Is the paperwork too much?

“Have I submitted my company accounts?”

“When’s my corporation tax return due?”

“Do I need to set up a PAYE scheme?”

Nobody loves paperwork, and these are all common questions you’ve more than likely asked yourself throughout the year. Compliance tasks such as submitting your corporate tax returns every year are often seen as a necessity to business owners, and they can be difficult without outside help from the likes of accountants and solicitors.

But even so, one advantage of an incorporated business is your annual accounts. Whilst they can often be a time-consuming process, keeping these in order with your tax returns will make your business easier to sell in the future should you decide to move on.

Who is looking at your business?

The answer might be more than you realise, because with the advent of Companies House, it’s easy for people to find information on your business such as turnover, profit and operating costs.

This means anyone from your competitors to customers and suppliers can access this information, meaning even if your business incurs a loss, the information is there for people to see. In this case, running an unincorporated might be more beneficial, as losses incurred by these are generally more favourable than those of a limited company due to the rates of tax involved.

Are you fully satisfied or do you need more advice?

Whether or not incorporation is still the best of way of trading for your business very much depends on the facts and circumstances of each particular case, and there is no shortcut to analysing these and reaching a conclusion. Similarly, if you decide to incorporate your business, there is again no shortcut to a carefully considered implementation plan, and it is always recommended you seek advice.

If you would like to discuss the advantages and disadvantages of incorporation, our specialist team is available to assist you and your business and provide some advice on your business’ setup.