To Incorporate or Not to Incorporate

Five years ago, it was a no brainer at almost any level. But as the current climate has changed so has the answer…

The tax system was such that incorporating simply put cash in your pocket because you paid less tax. However over the last three years Gordon and his merry men have tweaked the system. These days – savings can still be made but by the time you have paid extra costs to your accountant and dealt with the excess administration, there’s no financial gain in choosing this option.

So what used to be an easy decision is now much more marginal. There is a heightened sense of risk involved in starting a business in the current climate and as a result, Companies House is a busy place.

In many ways I disagree to this. Sure – there are nail-down reasons for incorporating. For instance, if you are taking on long term liabilities such as a shop or a pub lease, you are borrowing money, the business is to have equity investment or you are going to employ staff – then incorporation is the way to go.

However, if you work on your own as a gardener, plumber or an IT consultant – there are still very good arguments for being a sole trader.

It is one of those situations where it comes down to the view point of the business owner(s). As this blog aims to help you make these important decisions, here are a few thoughts to guide you:

To incorporate

  1. ‘Sleep at night’ factor – People very often feel better knowing that the downside is limited and that the house/ flat/ family are protected if things go wrong. Unfortunately, as result of this, suppliers, including banks, will ask for a personal guarantee – Try not to if you can avoid.
  2. Commercial factor – It is easier to present the business as bigger than it is and this can be a big commercial advantage. It is not immediately obvious how well established a limited company is, not to mention the fact you get to use impressive-sounding titles like ‘Managing Director’!
  3. Size factor – Once the business reaches a certain size, don’t worry – you’ll know when that is – incorporate. Be aware, with size comes increased risk because there is more that could go wrong.

Not to incorporate

  1. Personal extension factor – Some business owners treat their limited companies as extensions of themselves which can be problematic. The best example of this is if the company holds cash and the owner takes the cash for his own use without worrying too much about whether the business – which is a separate legal entity – is legally able to make the payment.
  2. The returns factor – There is one document and deadlines to worry about, not four. You will have to do a personal tax return regardless. The limited company must file an annual return, file accounts at Companies House and file a corporation tax return – and the latter two carry stiff penalties for being late.
  3. The privacy factor – Your business affairs stay private at all times.
  4. The cash factor – It is cheaper to get going and you can conserve cash where ever possible.
  5. The insurance factor – You can take out professional indemnity insurance and/or public liability insurance. Although you will probably do this whether you incorporate or not.
  6. The time factor – If you are worried about incorporating at this time, you can always incorporate at a later date.

Those are the key factors I see affecting the argument. Ultimately, it’s up to you and your individual circumstance. If you have anything to add to my ‘pros and cons’ list or want to tell me how you decided, do get in touch.

Tim

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2 thoughts on “To Incorporate or Not to Incorporate

  1. Pingback: How to set up a business at home: Regulatory « Bookkeeper Tim

  2. Pingback: How to set up a Business at Home – Regulatory « Start Up Donut blog

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