Incorporation – is it still worthwhile?

Zero per cent corporation tax is no more, meaning that the tax savings from incorporating a business are smaller. Trading as a limited company still offers benefits – it’s just that the decision is now less clear cut and you must consider the pros and cons carefully.

Incorporation can still save you money because you can avoid national insurance by paying yourself mainly in dividends. For example, turning a small business with profits of £50,000 into a company could increase the owner’s net income by over £4,000 a year. Even at lower profit levels, there are still worthwhile savings.

The company framework can also be more advantageous for retaining profits in the business. In a company, profits of up to £300,000 are generally taxed at only 19% – compared to the 40% most of them would suffer in a sole trader’s hands.

Doing business via a company has other advantages. Above all it gives you limited liability, helping to protect you from many business risks – though not those involving your personal guarantees. Companies are often easier to finance, especially as they get bigger.

You could appoint directors who are not shareholders, or give shares or share options to employees to give them a stake in the growth of the business, although you need to be careful about the tax issues. You can also give shares to family members, which could save tax on dividends and tax on the capital gain if one day you sell the company. There are some complicated tax issues that mean you should get competent advice when setting up the company share structure.

But there are some drawbacks to incorporation. Administrative costs are usually higher than for self-employment and companies must file accounts at Companies House. The accounts are publicly available, but small companies can file abbreviated accounts to minimise their exposure. Incorporation results in some loss of flexibility and company owners may find it difficult to accept that they are not free to draw on the company’s bank account without going through certain formalities. Company cars are heavily taxed.

If you decide to incorporate, the next question is when. You may be better off starting as a sole trader and forming a company later; on the other hand it is simpler to start off as you mean to carry on. We can help you determine what is right for you and take you through the whole process, leaving you free to concentrate on the all-important job of earning the profits.