Incorporation
One trading option for a business is to operate as a limited company. This will provide access to a number of tax planning strategies which will depend on the individual circumstances. A limited company is a distinct legal entity that is able to enter into contracts in its own name. This is important as it means that the company’s liabilities are the responsibility of the company and not necessarily the directors and shareholders responsibility.
The advantages and disadvantages of trading through a company are outlined below;
| Partnership/ Sole trader | Limited Company |
| If the business fails then all your personal assets are at risk.
The ability to carry back initial losses on commencement of a trade to recover tax paid on employment earnings in the previous 3 years. This can be very beneficial if a business requires significant start up costs. Personal withdrawal of funds from the business are not linked to the tax system. Less bureacracy and greater privacy as there is no requirement to comply with the Companies Act legislation or to supply information to Companies House. |
Personal assets are ususally protected providing it cannot be proved that a director has not provided a guarantee or has acted negligently.
Ability to restrict the rate of tax from 40% to 2o% on profits exceeding the basic rate of income tax (approximately £42,000) and below £300,000. Depending on the position of the company profit can be withdrawn as dividends, interest or rent etc. which may reduce the tax burden. After the first year of trading a limited company will generally pay tax later than an unincorporated business which may help with cashflow.
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