Starting a small business can be risky. But one way to limit your personal liability is through incorporation.
While many new business owners give a lot of thought to logo, premises, customer drivers, staffing and management structure (and rightly so), choosing the proper business structure in which to operate often doesn’t get the attention it deserves.
Many entrepreneurs don’t realise this, but the business form they choose can often spell the difference between success and failure, especially in today’s competitive marketplace.
Limited companies offer several distinct and money-saving advantages over other types of entities.
There’s no question that hard work and a little luck is what it takes to be successful. But a little forethought, especially when it comes to setting up your business, will help you stay successful.
Give it an identity and limit your liability
A limited company has its own legal identity. This means third parties contract with the ‘company’ and not the individual directors and shareholders. Not only does this allow a company to survive the death of the owners, but it also makes it possible for the directors and shareholders involved with the company to change over time.
A company’s existence will only cease if it is formally wound up, liquidated or by other order of the courts or Registrar of Companies. Another major benefit to incorporation is that the shareholders of the company have a limited or capped liability for the debts of the business.
The extent of their liability is the amount paid for their shares plus, if they have any, the unpaid amount on any nil or partly paid shares. In practice it is usually just the amount paid for the shares plus any unsecured loans made to the company.
Give your company something to shout about
There is certainly something credible about a private limited company. Its very status suggests that the business has permanence and is committed to effective and responsible management. This gives it a credibility that then offers suppliers and customers a sense of confidence.
Many companies, particularly larger businesses, will not deal with an entity that’s not a limited company. Incorporating a business can therefore open up new business opportunities that wouldn’t otherwise be available.
Another thing to consider is that a limited company has to have a unique name. Sole traders and partnerships do not necessarily have to adhere to this but there can only ever be one active UK limited company with any particular name. This means that, with some careful thought, you can help make your business stand out from the crowd.
Once you’ve registered a company with Companies House, your new company name is protected and nobody can use the same name or even a name that’s too similar.
Reap the tax benefits
Yes, that’s right. The perceived ‘hassle’ of starting a limited company can be offset simply with the knowledge that it pays off long term. You see, sole traders and partners in a partnership pay income tax while companies pay corporation tax and rates are lower than income tax rates.
On top of this a company can also pay dividends to its shareholders on top of employee salaries. A shareholder director will therefore often choose to receive the most tax efficient mix of salary and dividends.
It is also worth noting that companies generally have a more benign set of rules around allowable expenses. There is a range of allowances and tax-deductible costs that can be offset against a company’s profits.
Another tax benefit to consider is the pension possibilities of incorporation. Rather than an employee director funding pensions out of taxed income, the company can make pension contributions.
A company will often be able to make a higher tax relievable pension contribution than an individual and contributions will usually be a tax deductible expense for the company. It should therefore gain corporation tax relief against the value of the contribution.
There are no national insurance contributions for an employer or employee on pension contributions and contributions are generally not taxable for the employee.
Get extra cash if you need it
While sole traders and partnerships generally have to raise new capital from their own resources, companies are able to raise capital at any time by issuing new shares. The new shares can be offered to existing shareholders or new investors, although only public limited companies can offer shares to the public.
On top of this, if the company is going to borrow money from a bank it may be possible to secure the loan without the need for the directors to give a personal guarantee.
Starting and stopping
Interestingly a company does not have to trade to exist. It can be dormant which means it has made no ‘significant accounting transactions’ during its financial year. And this can be useful if have an idea and a name for a business but not yet the time or capital to develop it.
Equally, registering a business as a limited company can aid the possibility of selling it in the future, which can be difficult to achieve with other business structures. Entrepreneurs’ relief against capital gains tax may also be available on the sale of the business.
Believe it or not, it’s now easier than ever to start a limited company and it can all be done online. Long gone are the days of waiting weeks for Companies House to process the information.
Now you can start a limited company in just a few hours. What’s more, the cost is an allowable expense against corporation tax.
Henry Catchpole is the CEO of Inform Direct.