Download - Benefits of Incorporation
… Contemporary Practice… Established Values
Supporting Andrew Reid & Partners in its growth, now and in the future
The Benefits of Incorporationclarkhowes.com
2
… Contemporary Practice… Established Values
What business entities can I trade from?
The types of business entities chosen by our clients are as follows:
Sole trader
Individual trading on their own in their own name i.e. ‘one man band’
Partnership
Trades similar to a sole trader but with more than one individual sharing business profits
Limited Liability Partnership
Trades exactly the same as a partnership but importantly with Limited Liability
It is generally an entity used by professional services
Limited Company
Separate legal entity to the individuals that manage and trade within
Offers many commercial and tax based advantages
3
… Contemporary Practice… Established Values
What are the commercial advantages to trading through a Ltd
company?
Limited Liability
Safe guarding your assets
Personal assets are not at risk if the company and directors have acted within the law
Perception in the market place
Limited company status provides gravitas
Perceived business size
Supplier confidence
Linked to the business perception
Transparent business records
Ability to raise finance
Credit scoring ability
Future business sale
The business shares can be sold easily
Ties with business owner are not intrinsic
4
… Contemporary Practice… Established Values
Key employee incentives
Perception of job security and stability
Availability of share schemes to retain key staff
Management structure
Management can be separate to business ownership
Stability & continuity
A change in business owner does not necessarily affect the business going forward
What are the organisational benefits of trading through a Ltd company?
5
… Contemporary Practice… Established Values
What are the tax advantages when trading through a Ltd
company?
Corporation tax versus income tax and national insurance
The ‘family’ company
Timing of income
Maximising benefits in kind
Goodwill (for switchers)
Enhanced tax relief under certain government schemes
6
… Contemporary Practice… Established Values
Corporation tax versus Income tax and National Insurance
(from April 2013)
For unincorporated entities:
Income tax rates are 20%, 40% and 45%
National insurance rates are 9% and 2%
For incorporated entities:
Corporation tax rates are 20%, 23.75% and 23%
Dividends to the business owners are 0%, 25%, 36.11%
Examples showing tax saving by trading through an incorporated company:
Business profits of £20k : saving of £750
Business profits of £40k : saving of £2,551
Business profits of £60k : saving of £3,898 or £6,763
7
… Contemporary Practice… Established Values
The ‘family’ company
Maximising tax planning opportunities:
Husband and wife teams Do the children work for the company?
Example to show the overall business tax, personal tax and national insurance:
An unincorporated business making profits of £80k: £25,624
A company making profits of £80k (pre family income) with one business owner on £8k salary the rest being dividends: £20,493
As above with share ownership being 50% Husband and Wife on £8k salaries, employing 2 children (of working age) for a part-time salary of £8k per annum: £9,845
Grandfathering shares to children for retirement planning
8
… Contemporary Practice… Established Values
Timing of income
Paying tax on income rather than profits…
An unincorporated business pays tax on profits in the year that they arise
Problematic when say year 1 = £60k profits and year 2 = £20k profits
Overall tax for these 2 years: £20,436
Income is drawn from an incorporated business and therefore income can be
smoothed across see-saw years
Overall tax for these 2 years: £12,922
9
… Contemporary Practice… Established Values
Maximising benefits in kind
Including personal benefits through the Limited Company
For example: dental costs
Cost to the company £1,200
Business tax saved £240£960
Personal tax cost
£240
Effective cost
£1,200
Cost to individual
£1,200
Tax & NI paid
£564
Salary required
£1,724
Saving
£564
10
… Contemporary Practice… Established Values
Goodwill (for switchers)
Opportunity for those incorporating from a sole trader or partnership
Hugely tax efficient
10% tax rate for individual on sole trader business value
11
… Contemporary Practice… Established Values
Enhanced tax relief under certain government schemes
Certain tax opportunities are only available to Limited
Companies:
Research and Development tax credits
Patent box (10% effective tax)
12
… Contemporary Practice… Established Values
So…. Are there any disadvantages?
Increased administrative requirements
Costs
One off costs
Annual costs
Legislation
Directors duties & responsibilities
Companies Act
Publically available business records
Business losses
Greater flexibility in unincorporated businesses
Incorporation is one way (for now)…
13
… Contemporary Practice… Established Values
Thanks for listening!www.clarkhowes.com