The basic ways to structure your business are as a sole trader, in a partnership, or as a limited company. If you trade as a Limited Company you are said to be an “incorporated business” any other structure is called “unincorporated”.

You should think carefully about which structure would be best for your business. There are advantages and disadvantages whichever structure you chose so when deciding on the appropriate structure for running your business the following points should be considered:

Incorporated Business –  Advantages

An incorporated business has “limited liability”. This means that shareholders will not personally be held responsible for the debts of the company should the business fail. But any loans, leases or some contracts will usually require a directors’ guarantee.

  • It should be easier (and cheaper) to arrange liability insurances such as employer’s, public, product etc.
  • Status and credibility – a limited company presents a better image, and some businesses prefer to deal with companies.
  • Financing – it is often easier to raise finance and you can secure debt by a Floating Charge or Equity Funding.
  • Share capital can have several owners allowing you to pass ownership around the family, or business partners, and ensure continuity of the business in the event of your death.
  • Trading as a limited company is tax efficient for retained profits

Incorporated Business – Disadvantages

More paperwork is required to comply with the requirements of the Companies Act.

  • Although shareholders cannot be held responsible for the debts of the company it is possible for directors – whether they are shareholders on not – to find themselves held personally liable if they have allowed the company to continue trading whilst insolvent. However this is normally only a problem if a creditor places the company in liquidation.
  • Directors’ are considered to be employees and must pay both PAYE and National Insurance Contributions (NIC). Payments made to directors’ also attract employers NIC liability. However, a director who owns shares in the company can be paid a “dividend” which attracts neither employers nor employees NIC liability.
  • Payment of expenses is open to scrutiny and may lead to tax, NIC and VAT liability if not properly controlled and approved.
  • It can be tax inefficient for money to be taken out of the business: you could end up paying more income tax and leave yourself open to a possible double charge to Capital Gains Tax.
  • Legally you are not the company (which is an advantage when considering liability to debts) but this also means that the company’s money is not your money. Accounts will need to be filed at Companies House but small companies can claim exemption from having to deposit anything other than a very abbreviated balance sheet.
  • You can’t change your mind easily because there are no provisions to enable disincorporation without a tax penalty.

Unincorporated Business – Advantages

  • You are the Business and what you take out is up to you – and possibly your bankers!
  • Confidentiality – Accounts are not filed for public scrutiny.
  • Tax efficient for money to be taken out.
  • Potential to pay lower Income Tax & National Insurance contributions but this must be balanced against the lower benefits available to the self employed.
  • You can change your mind as specific provisions exist to remove tax penalty on incorporation.
  • There is a lower compliance burden: No annual returns, minutes, registers etc.

Unincorporated Business – Disadvantages

  • Unlimited liability – if your business fails your private property, including your house and all your possessions, can be claimed by those to whom you owe money.
  • It is more difficult to distribute ownership but limited/sleeping partners possible – but beware of possible tax liabilities.
  • Your business may lack credibility particularly if you are dealing with large companies, or entering contracts.
  • Raising funding by means of a floating charge is not possible but other methods of funding (such as factoring – if you are big enough) can overcome this to some extent.

On Balance

  • Until recently the costs and paperwork involved in trading as a limited company allied to a more generous tax treatment for unincorporated businesses would have made your choice easier. Reduction in the costs and complexity of running a limited company, and the move to self-assessment and a “current year” basis of taxation of non incorporated businesses, tends to suggest that for most people trading as a limited company would be the preferred route.
  • The proper management of a business conducted via a limited company will require more control and input from your accountant. This is likely to be on a quarterly or monthly basis. However, not only will such involvement save you money, it will also have other benefits as you should be alerted to problems by the provision of regular management accounts. Your bank and any potential lender or investor will be more impressed and helpful when they know your business is being run in a structured manner. Because they don’t have to keep tight control unincorporated businesses tend only to seek advice from an accountant when they are in trouble or seek finance. By that time it is often too late for an accountant to help them at a reasonable cost  – if at all. Prevention (of problems) is better (and cheaper) than the cure!
  • No two businesses are the same and so each case must be considered on its merits. If in doubt, the safest course is to start trading as an unincorporated business, leaving the option of incorporation at a later date open.

These notes are designed to give an overview of some of the issues which need to be addressed by those starting their own business. They are provided on the basis that neither the author nor the site owner are thereby engaged in rendering legal or other professional services. If legal advice or other expert assistance is required please contact james (at) jamesgreenandco.co.uk.

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Category: Starting a Business

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