Why would I want to incorporate my business – and why not?
As accountants for small businesses, we understand that there are some really detailed advantages and disadvantages to incorporating a small business. In this blog, we’ll cover some of the more obvious areas that will be decisions made by almost every business owner.
The first and main financial advantage of incorporating is tax. Put simply, a business owner doesn’t pay National Insurance (if they’re doing it right), and so there’s a huge chunk of what’s known as Class 2 and Class 4 National Insurance that won’t be payable on incorporation. And again, if done correctly, there won’t be any other classes (the classes are another lesson entirely!) payable through the business owner’s position as an employee of the company either.
Business accountants tend to cost more when you have a company – make sure you ask your accountant whether their fees will be more or less than the tax saving; otherwise, the financial benefits won’t be the headliners on incorporation.
Another advantage of incorporating is that the company’s income is held in the company until you take it out. That’s to say that it’s taxed at Corporation Tax rates and nothing else until you touch it. This means that you’ll only pay income tax when you choose to, not when you earn the money in the first place, like with a sole trader or partnership business. It means you have options on when the income is taxed further which is handy for tax planning.
Incorporating your business means it’s a separate entity to you as a person. A number of benefits come with this, such as it is a legally different entity, which means you can be an employee of your company, and it can provide you with benefits in kind that mean overall your tax bill is lower. The ins and outs of this are lengthy, but flexibility is the key point when you incorporate it.
Image is important for startups. You could be “John Smith Trading as Global Successful Business” as a sole trader or simply “Global Successful Business Limited” if a limited company. See the difference? Many people choose to have a company just because it appears to be more bona fide than their own name, trading as X.
The main downside (in our view) to incorporating is the public visibility. An element of your accounts and the key information about your company are on public record. So, although others won’t be able to see your turnover, they will be able to see other areas of your business. As expert business accountants, we can advise you on this; there are (legal) ways to arrange your finances to mitigate any exposure you’d rather not open yourself to. There are also rules in place to make this reporting generally inflexible!
If you’re thinking about incorporating, it’s worth asking us what we think in accounting terms. It’s easy to focus on one benefit over others, but in our view, it’s definitely not a foregone conclusion! So get in touch or call 0116 255 2422
