Should I Incorporate My Business?

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 employee of the company either.

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. Which 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 being a legally different entity, it 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.

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 small business accountants we can advise 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!

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