< Go Back When and how to incorporate Posted: Oct 1, 2019 When and how to
incorporate
Over
the last decade, corporation tax rates for most companies - irrespective of
size - have fluctuated between 19% and 21%. The main rate of corporation tax is
expected to be cut to 17% from April 2020.
Current
corporation tax rates are still pretty favourable and are indeed generally
lower than those paid by many individuals. In addition, there are other areas
where company formation may help save tax. Although the costs and regulations
involved with running a company are usually greater than trading as a sole
trader or in partnership, and more administration is generally needed, using a
company as a vehicle through which to trade remains a popular choice.
The
starting point for dealing with companies and company directors is to remember
that a limited company exists in its own right, which means that the company's
finances are separate from the personal finances of the company owners. Strict
laws mean that the shareholders cannot simply take money out of the company
whenever they feel like it.
When to
incorporate
The
question of whether to incorporate commonly arises as a business expands - the
limited liability status that company formation provides is often needed to
start winning contracts with bigger companies. However, incorporating may not
be such a good deal in the early days of trade, or if there is no intention to
grow beyond the status of a solely owned business. This may be particularly
relevant if losses are envisaged in the early years of trading - for sole
traders and partnerships, it is possible to carry back losses made in the first
four years and offset them, where applicable, against personal income of the
three preceding years. This often results in a substantial refund of tax
becoming due and may offer a much-needed cash boost to the business.
How to
incorporate
Firstly,
the company must choose a name, which cannot be the same as another registered
company's name. If it is too similar to another company's name or trademark it
may have to be changed.
The
company must have at least one director who is a natural person, and a public
company must have at least two directors. A private company need not appoint a
company secretary, although in practice many choose to do so.
There
must be at least one shareholder or guarantor, who can also be a director.
The
company will need to prepare a 'memorandum of association' and 'articles of
association', as provided for by Companies Act 2006. Broadly, these documents
set out how the company will be run.
Private
limited companies are also required to maintain a register of those persons who
have significant control of the company - known as a 'PSC Register'. The
function of the Register is to increase corporate transparency for the purpose
of combating tax evasion, money laundering and terrorist financing.
The
company must register with HMRC for corporation tax at
the same time as registering with Companies House. This must be done within
three months of starting to do business. The company may also be required to
register for VAT if it meets the registration criteria.
Although
there are disadvantages to incorporating a business, the lower tax rates and
other reliefs currently on offer still make it an attractive proposition. Some
advantages worth considering include:
ability to pay dividends to shareholders, which may in turn reduce
liability to National Insurance Contributions (NICs) flexible succession planning, particularly for inheritance tax
purposes great investment opportunities, for example potential to raise
money through tax-efficient schemes such as the Enterprise Investment Scheme
(EIS) limited liability status for shareholders, although directors may
be asked to give personal guarantees of loans to the company and may still be
held liable for the debts of a company potential increased saleability Business owners are recommended to evaluate the advantages of
incorporation on an on-going basis.
Partner note: HMRC guidance: Set up a limited company: step-by-step (https://www.gov.uk/set-up-limited-company ); Companies Act 2006, Part 2; Register for VAT (https://www.gov.uk/government/publications/vat-application-for-registration-vat1 )