One of the questions we get asked most often is “Should I incorporate?” and if you’ve come to this blog post looking for a simple answer, I might have to disappoint you.
Like most decisions about your business structure, this depends on various factors, none of which should be considered in isolation.
Make sure you’ve considered both the pros and cons of limited company and sole trader structure, and speak to an accountant before you make your decision.
In the meantime, here are five key points that could indicate a limited company is the right structure for you.
1. You’re planning for growth
The most significant benefit of forming a limited company is that it allows you to separate your business’s finances from your own. That means your personal assets such as your savings, home and possessions are better protected if things go wrong in your business.
This isn’t a huge concern if you’re not investing much money into the business itself. If you’re providing professional services on a freelance basis, for example, and your costs go no further than your website and electricity bill, the consequences of business losses on your personal finances might not be too severe.
But if you decide to scale up, the costs of things like your premises, workforce and equipment will increase – and with them, so will the risks. That’s when the protection of a limited company becomes more important.
Remember, it’s often best to incorporate before you start making those larger investments, so your personal assets are protected from the start.
2. You’re streamlining your tax position
Limited companies are in many cases – but not always – more tax-efficient than running your business as a sole trader.
Corporation tax is charged at 19% on profits in 2021/22, rather than the 20%, 40% or 45% rates of tax on income, making it more cost-effective to keep your profits within that structure.
There are also some tax reliefs and allowances that only apply to limited companies: capital allowances, R&D, and the patent box, just to name a few.
3. You need access to finance
As well as the protection a company offers to you if you’re taking on debt or attracting investment, it can also be more appealing for lenders or investors.
If you’re seeking investment in particular, limited companies are better set up for this as you have the option to issue equity via shares – something you can’t do as a sole trader.
4. You’re going for bigger contracts
Similarly, there are some people and businesses that prefer working with companies over sole traders.
This is in some ways more about appearances than anything else. A lot of people see limited companies as more serious, and more credible than sole traders, even if the work you’re doing is essentially the same.
Depending on the sector you work in and the type of business you run, you might find that incorporation gives you the edge over the competition.
5. You’re thinking about succession
If your plan is to pass your business onto the next generation at some point in the future, or to sell it off, incorporating ahead of time can make that process smoother.
Transferring ownership of a company can often be simpler than with a sole trader business, because the ownership is determined by shares. If you want to step back from the business at some point, you can sell your shares.
This is relatively straightforward compared to sorting through every aspect of a business that you might have put your name against as a sole trader.
A word of caution: IR35
One of the pitfalls to be aware of, particularly if you offer professional services, is IR35.
This piece of legislation changed for private sector businesses on 6 April 2021, and depending on certain conditions it might mean you have to pay more in tax when you provide services through a limited company.
This won’t always be the case, but it’s a good idea to check whether you might be affected.
From tax considerations to the paperwork, we can advise you through the process of forming a limited company.