One of the most important decisions a business owner has to make is whether to operate as a sole trader/partnership or via a Limited Company. Company tax rates have fallen in recent years and this has made the Company route more attractive even to those posting relatively low levels of profits. However, any decision on incorporation should not be taken on tax grounds alone. The nature of the business, its trading methods and even the personal circumstances of the owners need to be taken into consideration before a conclusion is reached and it is therefore essential that you take advice from your accountant before making your decision.
Ignoring the nuances which will colour individual decisions, there are try starting a new limited company a few areas which apply to all decision processes. These include:
- Who owns the business? A limited company is a separate legal entity and this means that the directors have to act in the best interests of the company rather than their own best interests whilst a sole trader has a lot more freedom to make changes within the business structure. However, business debts run up by a limited company stay as the debts of that company whilst those of a sole trader fall on the business owner themselves.
- The ongoing tax and legal implications. Not only are the tax structures different, limited companies have legal obligations to file company accounts and publish documents such as board minutes and resolutions. This can result in additional costs as well as a loss of privacy. However, given the current corporation tax rate and the flexibility of remunerating “owners” via salary or dividend these costs are usually outweighed by tax savings.
- What happens on sale or transfer of business? Limited companies tend to be viewed as more professional and therefore can often command a higher price on sale. In addition the ability to buy, sell or transfer shares can make the transfer of ownership of a company a relatively simple matter as well as potentially assisting with IHT planning.
- Special considerations for existing businesses. Switching from sole trader to limited company or back again can be a minefield with financial, tax, contractual and legal issues all requiring careful planning. For example, contracts with suppliers may need to be renegotiated whilst the timing of the transaction can have a profound effect on available tax reliefs.