When establishing a business, one crucial decision is determining the appropriate legal structure. For entrepreneurs and investors looking to expand their operations, the choice between incorporating or not can significantly impact their prospects and overall success.
In this article, we will examine the advantages and disadvantages of incorporating a business in the UK, providing you with valuable insights to make a more informed decision:
Advantages of incorporating in the UK
1. Limited liability protection
One of the primary advantages of incorporating a business is the limited liability protection it offers.
By establishing a separate legal entity, such as a private limited company, generally, the company’s shareholders aren’t personally liable for the debts and obligations of the business. This shields their personal assets in case of business failure, reducing the chances of individual financial risk.
2. Credibility and trust
Incorporating a business can enhance credibility and trust among customers, suppliers and partners. Having ‘Ltd’ or ‘Limited’ after a company name conveys professionalism, stability, and longevity. This can be particularly beneficial when dealing with international clients or investors, who may have greater confidence in conducting business with a registered entity.
3. Access to investment opportunities
A registered company can issue shares, allowing for more flexible equity ownership than unincorporated businesses. Share ownership may attract more potential investors, especially with the availability of tax incentives for company shares. Additionally, incorporated businesses often find it easier to obtain business loans, credit lines, and other forms of financing from banks and financial institutions.
4. Tax benefits and incentives
Incorporating can provide tax advantages, such as lower corporate tax rates and various deductions, depending on the nature and size of the business. As well as this, the government provides certain tax incentives and schemes to promote entrepreneurship and innovation, which can be beneficial to incorporated businesses.
Disadvantages of incorporating in the UK
1. Administrative responsibilities
Incorporating a business involves complying with various legal and regulatory requirements, which can result in increased administrative burdens and can potentially complicate decision-making. These obligations include maintaining financial records, filing annual accounts, submitting Corporation Tax returns, and adhering to company law.
Partnerships and sole traders who incorporate may find these additional tasks time-consuming and costly.
2. Set-up and maintenance costs
Registering a new company incurs expenses, including registration and legal fees, plus the ongoing annual accounts and tax compliance costs. While the exact costs vary based on the company’s size and structure, they can be higher compared to other organisations, such as sole traders or partnerships.
3. Public disclosure requirements
Incorporated companies must comply with certain public disclosure requirements, including filing annual financial statements, disclosing information about directors, and making these details available to the public. While this transparency fosters accountability and trust, some businesses may prefer to keep certain aspects of their operations private.
4. Additional tax burden
Incorporation is likely to increase the tax filing and returns required each year.
A company has to file its own tax return and pay Corporation Tax on profits. However, directors and shareholders will also have to declare income drawn from the company on their personal tax returns. What would simply be proprietor’s drawings in a sole trade, need to be accounted for as salary in a limited company, and PAYE deduction made and paid over to HMRC monthly. Where a company provides directors or employees with ‘benefits in kind’, such as use of a company-owned car or private medical insurance, there are additional P11d returns to file and company National Insurance Contributions to be paid.
So, what should you do?
Each entrepreneur or investor must carefully evaluate their specific circumstances, goals, and preferences before deciding when to incorporate. Considering the business lifecycle and key milestones can help determine the ideal moment to pursue incorporation for long-term success and sustainability.
Limited liability is a valuable advantage of incorporation, as is the potentially lower rate of tax on profits, but these come at the price of far greater complexity and annual compliance costs. A business with modest annual profits and few assets is unlikely to benefit financially from incorporation, but as the business grows it may be worth revisiting this in future.
The Burton Sweet team can provide a comparison of the running costs and annual taxes of a limited company versus sole trade/partnership, so that you can make an informed decision.
If you’re thinking about incorporating your business, please get in touch with us. We will happy to discuss the process in more detail and what this could mean for your organisation moving forwards…