incorporation

Young & Co.

CHARTERED ACCOUNTANTS AND REGISTERED AUDITORS

We are often asked “Should I form a limited company?” The answer depends on the business, its anticipated rate of growth and the degree of commercial risk.

In the early years of running a business, the privacy of operating as a sole trader or partnership can prove more beneficial. There may also be tax advantages in starting as a sole trader or partnership and incorporating into a limited company after a few years.

Whilst taxation on limited companies is lower than that of sole traders or partnerships, any monies taken by the directors must be through the PAYE scheme and hence taxed. This can be negated to some extent by reducing the directors salary and opting to vote a dividend, but dividends have to follow the shareholding.

Benefits in kind are much tighter for limited companies, especially the provision of company cars. As a sole trader or partnership, the owner or partner will probably pay no direct tax on company cars. A director of a limited company will usually be taxed on both the benefit of the car and the fuel used in the car.

Advantages of incorporation

Incorporation normally provides limited liability. If a shareholder has fully paid for their shares, they cannot normally be required to invest any more in the company. However, banks often require personal guarantees from the directors for borrowing.

l	Effective ownership can be readily transferred, making limited companies generally easier to sell.
l	Banks normally take extra security via a floating charge over the assets of the company. Whilst the laws relating to this are currently under review, a charge can reduce personal guarantees or enable you to borrow more.
l	Being a limited company has a perceived benefit adding to the credibility and respect of the business.
l	If a company fails, there is usually less risk to personal and family assets.
l	Directors can pay less tax by selecting a lower salary and higher dividend.
l	Companies pay tax on profits between £10,000 to £50,000 at 10% and £50,000 to £300,000 at 19%, rather than basic rate of 22% or higher rate of 40%. Companies may also have to pay tax of up to 19% on dividends declared.
l	With correct planning, shareholdings can be split between family members to further reduce higher rate tax liabilities.
l	Company approved pension schemes can be more flexible than self-employed ones.

Disadvantages of incorporation

Normally when you form a company, you incur legal and administrative costs. The 1985 Companies Act requires that proper books and records be maintained. Annual accounts must comply with the Act. Statutory audits are required for all companies where turnover exceeds £5,600,000.

l	A company’s accounts must be filed for public viewing at the Registrar of Companies.
l	Costs for preparing statutory accounts (and where applicable, audited accounts) are usually higher than that of a sole trader or partnership.
l	There are stringent legal obligations on directors to comply with the provisions of the Companies Act.
l	Banks often require directors’ personal guarantees. This can remove much of the benefit of limited liability status.
l	Directors pay is subject to both employees and employers national insurance. This is currently 10% and 11.8% respectively.
l	Directors pay is taxed monthly through the PAYE scheme. Tax must be paid by the 19th of the following month.
l	Tax losses can not be set against other income.
l	Directors are more at risk from criminal or civil penalty proceedings.
l	Taxation of company cars is much more onerous.

Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales