Is it a good idea to incorporate your business?
There are a number of issues that impact this decision. Some are rooted in taxation, some in business process and others in reputation or business image.
However, recent tax changes have significantly impacted this area. The other pros and cons, which we discuss elsewhere, remain the same but for some small business owners the changes may alter their decision.
Historically, incorporation has been tax efficient for owner-managers. It provided flexibility in when and how money is drawn (and, therefore, when and how some taxes are paid) and allowed owners to benefit from the lower dividend rates.
The new dividend taxation regime means that, all else being equal, a business owner earning say £150,000 in profits will now earn similar net cash payments after all relevant taxes and National Insurance regardless of whether you act as a sole trader or a limited company. The reforms to the dividend tax regime are effective – the tax savings of incorporation aren’t as obvious as they used to be.
This said, many of the flexibilities offered by companies remain, so its not that simple. For example, using a company you can maximise pension contributions, or delay taxation by utilising surplus profits in different ways. Despite the headline effects of the recent changes, the flexibility of incorporation is often still very attractive.
The net result: the answer to the question is perhaps less clear cut than any other time in recent history. Your personal circumstances, goals and future plans will impact much more heavily on the decision.
Of course, never let the tax tail wag the dog. In some cases incorporation is the only answer. You may want to benefit from the limited liability, or you may need to be incorporated to secure certain contracts.
Do give the question some thought. If you would like further guidance or want to discuss how you structure your business, just get in touch.