When is it the right time and how to incorporate your business ?

Introduction

Over the last decade, corporation tax rates for most companies –
irrespective of size - have fluctuated between 19% and 21%. The main rate of
corporation tax is expected to be cut to 17% from April 2020.

Current corporation tax rates are still pretty favourable and are indeed
generally lower than those paid by many individuals. In addition, there are
other areas where company formation may help save tax. Although the costs and
regulations involved with running a company are usually greater than trading as
a sole trader or in partnership, and more administration is generally needed,
using a company as a vehicle through which to trade remains a popular choice.

The starting point for dealing with companies and company directors
is to remember that a limited company exists in its own right, which means that
the company’s finances are separate from the personal finances of the company
owners. Strict laws mean that the shareholders cannot simply take money out of
the company whenever they feel like it.

When to incorporate

The question of whether to incorporate commonly arises as a
business expands – the limited liability status that company formation provides
is often needed to start winning contracts with bigger companies. However,
incorporating may not be such a good deal in the early days of trade, or if
there is no intention to grow beyond the status of a solely owned business.
This may be particularly relevant if losses are envisaged in the early years of
trading – for sole traders and partnerships, it is possible to carry back
losses made in the first four years and offset them, where applicable, against
personal income of the three preceding years. This often results in a
substantial refund of tax becoming due and may offer a much-needed cash boost
to the business.

How to incorporate

Firstly, the company must choose a name, which cannot be the same
as another registered company’s name. If it is too similar to another company’s
name or trademark it may have to be changed.

The company must have at least one director who is a natural
person, and a public company must have at least two directors. A private
company need not appoint a company secretary, although in practice many choose
to do so.

There must be at least one shareholder or guarantor, who can also
be a director.

The company will need to prepare a 'memorandum of association' and
'articles of association', as provided for by Companies Act 2006. Broadly,
these documents set out how the company will be run.

Private limited companies are also required to maintain a register
of those persons who have significant control of the company – known as a ‘PSC
Register’. The function of the Register is to increase corporate transparency
for the purpose of combating tax evasion, money laundering and terrorist
financing.

The company must register with HMRC for corporation tax and PAYE as
an employer at the same time as registering with Companies House. This must be
done within three months of starting to do business. The company may also be
required to register for VAT if it meets the registration criteria.

Although there are disadvantages to incorporating a business, the
lower tax rates and other reliefs currently on offer still make it an
attractive proposition. Some advantages worth considering include:

·
ability to pay dividends to shareholders, which may in turn reduce
liability to National Insurance Contributions (NICs)

·
flexible succession planning, particularly for inheritance tax
purposes

·
great investment opportunities, for example potential to raise
money through tax-efficient schemes such as the Enterprise Investment Scheme
(EIS)

·
limited liability status for shareholders, although directors may
be asked to give personal guarantees of loans to the company and may still be
held liable for the debts of a company

·
potential increased saleability

Recommendation

Business owners are recommended to
evaluate the advantages of incorporation on an on-going basis.