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To incorporate or not incorporate

If you are currently trading as a sole trader or a conventional partnership, you should consider whether it is time to become a company. This process is known as incorporation. At a certain point, incorporating your enterprise can bring you and your business big benefits. Here are the main ones:

Limit personal liability

Becoming a limited company protects your personal assets. If someone sues your business, your personal assets cannot be used to pay any compensation that is awarded.

Easier to raise funds

Finding funding for a company is usually far easier than it is as a sole trader or partnership.

Tax benefits

For many firms, becoming incorporated brings a reduction in the amount of tax paid. Paying less tax enables a firm to make more of a profit. Those profits can be invested in the business or used to reduce a firm’s prices, making it more competitive.

The only way to be sure that you will end up paying less tax is to consult a well-qualified and experienced accountant. UK business tax regulations are complicated and change frequently. You need to be sure you are working with the most recent information to ensure that you make the right decision for your firm.

Possible drawbacks of incorporation

As a structured or incorporated business, you have additional legal obligations. It is important to understand these obligations and fulfil them in full. For example, how your accounts are filed becomes more complicated. Some firms find that they end up paying more tax.

There are also capital gains tax implications. If you plan to pass your firm on to a family member, you need to understand how being incorporated will affect inheritance tax.

Whether you incorporate or not, is an important decision with many implications. You need good advice when making this decision, and an experienced accountant will give you up-to-date advice that will ensure you make the right decision.

Posted by Peter
October 11, 2014

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