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Supporting Andrew Reid & Partners in its growth, now and in the future

The Benefits of Incorporationclarkhowes.com

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… 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

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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

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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?

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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

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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

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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

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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

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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

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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

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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)

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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)…

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