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Incorporation Is it still worthwhile

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.

Giving shares to family members 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 selfemployment 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.

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.