Thinking of incorporating your business?
Many small businesses start off as sole traders or partnerships. These are called unincorporated businesses and are an alternative to trading through a company. There are sound reasons for starting off as an unincorporated business, including:
1. There are relatively few legal formalities;
2. The major financial exposure of start-ups often is to bank lending, which is likely to be secured by a personal guarantee (which reduces the effectiveness of limited liability);
3. There are some special tax reliefs which allow losses made in the early years of trading to be used in an advantageous way; and
4. It is possible after establishing valuable goodwill in the business to sell it to a company owned by the proprietor and/or his family and extract that sum tax free from the company (having perhaps only paid CGT at 10% when the goodwill is sold). In the right circumstances, it is possible for the new company to write off the amount it has paid for goodwill against its profits chargeable to corporation tax.
It is quite common to start off as an unincorporated business with the intention of incorporating in a few years time. The advantages of following that path include:
1. There is limited liability once bigger trading risks are encountered. Limited liability means that, other than in respect of debts which the owner has guaranteed, the proprietor`s home and personal assets should not be at risk;
2. Companies are associated with established, reputable businesses;
3. The proprietor can extract profits from a company by way of dividend at a lower rate than income tax rates and free of PAYE and NICs;
4. Corporation tax rates generally are lower than income tax rates. If the profits are to be re-invested in the business, there is likely to be less tax paid; and
5. Interest relief for pre-incorporation loans should be available after incorporation.
The decision about if and when to incorporate is a complex one. There are many factors to take into account in addition to those outlined above. Many of those depend upon the particular business and the proprietor`s personal circumstances. It is important that a proprietor consults carefully with his accountant when considering an incorporation of his businesses.
There are two main routes to incorporate a business:
1. The sale of the business and assets to a new company for cash (including perhaps a loan); or
2. The transfer of the business and assets in exchange for being issued shares in the new company.
They both have their pros and cons. Most modern incorporations use route 1, but the better route will depend upon the particular circumstances.
The transfer of a business and assets benefits from professional legal advice, including around employees, commercial arrangements, funding and real property issues.
It is important for the accountants and lawyers to work closely to ensure a successful incorporation.
If you have any questions about incorporating a business or any other company law or tax matters, please contact Nasim Sharf on 01482 337336, or email firstname.lastname@example.org
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.