Pros and Cons of Incorporation
Moving to a limited company setup is a big decision for anyone. There are many fors and againsts with this argument. But what you need to consider if whether the move is right for you and your business. Many bigger businesses are at least a private limited company rather than a sole trader or partnership. That doesn't mean however, that it's the option you should go for.
Why you should become incorporated
1. Separate legal entity
Probably one of the biggest positives to becoming an incorporated company is the legal separation from its directors. With a sole trader, the business and the owner is the same legal entity, so if anything goes wrong or if the business owned money, the owner would be personally liable. With a limited company, the risk stays with the company, and to most extent, the directors aren't liable. However, they do have a some responsibility for the company (the Gov UK web site lists them nicely here).
A good example of this is, if a customer took the business to court, with a sole trader it would be the owner, whereas with a limited company it would be the company itself.
2. Credibility
A sole trader business can be set up in no time at all, and there is no hard proof that they are even a legitimate business. That's not to say that sole traders shouldn't be trusted as there are many well respected sole trader businesses in operation. However, with a limited company, you need to register with Companies House and they will issue you with a registration number (for example, ours is 5100477) which can be looked up online. On that basis alone, some people place more trust in a limited company.
3. Tax
Tax is charged differently on a company than what it is for a sole trader. If you're running a sole trader business where the income is starting to reach a point where it can be high, your accountant may advise you to become a limited company to take advantage of your personal tax savings.
Whereas with a sole trader set up your profits are seen as your income and you'll be taxed on these, a limited company is completely separate and the director is taxed as an employee.
However, this isn't always something that's suitable nor right for some people, so check with your accountant to be sure.
4. Raising Capital through Shares
If you're looking to branch out into a new area, or need new equipment, a limited company has the advantage of shares. You can sell shares to friends, family or other investors to help your business raise capital.
Why you shouldn't become incorporated
As with most things, there's usually a downside too. With a limited company, there are some tighter rules on compliance, and a bit more form filling. But with the right tools these can be easy enough to keep on top of.
1. Your documents are public
With a sole trader, what profit you make is kept between you and HMRC. However, as we mentioned above, your company can be verified online through the Companies House web site using their registration number or name. While it's great that you can do this, it also shows any documents that you have submitted to Companies House, which includes:
- CS01 Confirmation Statement - To confirm everything is up to date
- IN01 Initial Registration Document - complete with names of directors, their service address and month and year of birth
- MR01 Mortgage Charges - Any mortgages filed against the company
- And Many More
The documents are downloadable in PDF format. If they're handwritten, you can download the original document. But any profits you declare to Companies House will be publicly visible.
2. Additional Compliance
A bit more red tape comes into play with a limited company. The CS01 Confirmation Statement which comes into play from July 2016, is one of the forms you will need to fill in and return on an annual basis. Of course, with the submission of your accounts too, you will likely need an accountant which could add to the cost of running your business.
3. Director's Responsibilities
A director is responsible for many aspects of the business, and if they fail they could be held responsible for their actions - not just by the business itself, but by the relevant Government body (whether this is HMRC, Companies House or another department).
Recent proof of this can be seen with the collapse of BHS, where Sir Phillip Green had to appear before MPs. The issue may not be with him directly, it could be with the buying department, but as a director, he's responsible.
Should I be a sole trader or a limited company?
This is a decision that only you can make. However, it's recommended to call upon business advisors and your accountant to help you with making this decision. They can most likely help with the tax issues and the general running issues to help you make an informed decision.
Let's go incorporated!
We can help you too, here at Company Wizard. With over 10 years experience with company formations, and being an e-filing partner with Companies House, we can make light work of some of the form filling!
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