To incorporate or not?

This is the one question that constantly arises from traders, about whether or not they should operate their business as a soletradership, or as a limited company.

Like all decisions in life there are plusses and minuses, and NO right answer.

There are a myriad of issues in respect of commercial reality, tax mitigation, perception to customers and suppliers, and the feel good factor.

Some individuals wish to trade under the guise of a limited company to give an indication they are bigger than actual, others do it to protect themselves against a customer going “belly up”, some do it to control the amount of personal tax they pay, and others do it to offload income to their spouse (ie the spouse is merely a tax write off).
Always remember that if money is owed to the bank, the bank requires personal guarantees, so personal liability is still in place,  the only difference is the tax man and other suppliers can be told to “go and hoke” (subject to certain items such as employers national insurance etc)

The general rule is that you incorporate your business under the following circumstances:

1.    If you can be in a position to control your extractions from the company. E.g. pay yourself a smallish salary, and take the rest out as dividends, and pay no tax thereon (unless you reach high rate tax, even so you avoid Employers NIC)
2.    Actually have a supplier base, and customer base, that the company is seen as trading, and not just an individual offering his time as services (lok up IR35 on your favourite search engine)
3.    If you have a wish (under current legislation) to develop your business and then sell it in a few years. (to avail of 10% tax rate on disposal)
4.    If your net profit is over 50k per annum, and you are happy to live on less money, and pay tax at 20% instead of 40%
5.    If you may have a concentration of income on a customer  who may go belly up, and leave you with an inability to meet your debts
6.    If you wish to do something hookey, and if  caught, you can walk away from Revenue and Customs (false invoicing and fraud aside)

There is no correct answer, and bottom line is that if you speak to your accountant in the same way as you would speak to your doctor (ie openly and honestly), he/she can advise you on whether or not to incorporate.

A recent practical example were two people in the same industry (electrical installation), where one clients customer base was domestic, the other was commercial.

Both businesses were making the same level of profits, but :

1.    One business owner had his mortgage paid off, the other was working to pay his mortgage.
2.    One business owner  was mid twenties, the other was early fifties.
3.    One business had top 25 customers of £20k per annum each, the other had turnover customers of £400 each
4.    One was married, the other was divorced
5.    One had children, the other had suspicions
6.    One business owned their premises the other had a 10 year lease without break clauses
7.    One had an attitude like Del Boy, the other was a saint

The above are merely 7 differences in two identical businesses, so for the mathematically oriented there are 2 to the power of 7 permutations, ie 128 different answers whether or not to incorporate.

In this example I have restricted the options to seven to make a point.  In  real life, the number of possible differences is exponentially greater,  and hence it is important for the accountant to “know thy client”, both in current terms, and in aspirations.

There is one downside.  Tax laws are constantly changing.  4 years ago,. It was possible for a person to earn 30k per annum, and personally pay NO tax, and NO national insurance personally, but for their company to pay around 3 ½ k to Her Majesty Revenue.  Ie a tax rate of under 12%, but the chancellor realised he was a silly boy, and changed the rules. Its just a pity the government have no sense of humour.  They’d be a lot more popular.