| One
of the most important issues to consider when setting up a
new business (or reviewing a mature business) is the legal
structure. Should you trade through a self-employment (for
this purpose a partnership is a type of self-employment) or
through a Limited Company?
In
the past, there has been far more uncertainty than there is
now. Recent changes to both Corporation Tax and National Insurance
has led to the conclusion that incorporation whilst not as
attractive as in the recent past can be suitable across a
wide range of circumstances. Any serious business with profit
over £25,000 per annum could be worth incorporating.
You
are able to change from self-employed into a Limited Company
and vice versa, but there is upheaval and cost involved, so
any decision should be considered as long term.
The main
arguments for incorporating are:
- Limited
liability can protect your personal assets in the event
of certain business failures.
- If
the circumstances are right you can pay dividends (if applicable
- to a spouse) to reduce your overall Tax and National Insurance
burden.
- You
can take advantage of the State Second Pension (even with
a low salary).
- You
can leave profits in the company and be taxed at a lower
rate.
- It
is relatively straightforward to sell (or gift) all or part
of a company.
- Share
options can be granted to key employees.
- Some
potential customers may feel that your business has more
credibility as a company.
- Some
potential customers may insist that you are trading as a
company.
- Finance
raising is often easier.
The
main arguments against incorporating are:
- It
creates a separate legal entity, so the tax and financial
issues are more complex.
- First
year losses cannot be carried back against personal Income
Tax previously paid.
- The
tax planning, strategy and compliance required for yourself
and the company, and the increased administration required
to comply with the Company Law will take up more of your
time and will lead to higher annual Professional fees (by
around £1,000) as well as set-up costs of around £650
(including advice on shareholdings, remuneration, payroll,
VAT, bookkeeping).
- Financial
information becomes available to the public.
- The
company’s money does not belong to you (although it
can make loans of up to £5,000 to each Director) –
tax has to be considered at the time money is withdrawn.
- You may be more
exposed to the Inland Revenue’s IR35 legislation affecting
‘Personal Service Companies’.
- Ability to claim
certain expenses (especially motor) can be adversely affected.
- Tax on the capital
gain on ultimate disposal can be adversely affected.
- The strategy
may also adversely affect PHI policies.
There
are other issues, such as long-term strategy, pension planning
and your personal tax and financial position which will also
need to be considered.
If you
are thinking of starting a business or changing your existing
business, please call us on: 020 8876 1097. |
