Incorporation ― introduction and procedure

Produced by Tolley in association with Julie Butler

The following Owner-Managed Businesses guidance note Produced by Tolley in association with Julie Butler provides comprehensive and up to date tax information covering:

  • Incorporation ― introduction and procedure
  • Key reasons to incorporate
  • Incorporation procedure
  • Trade marks searches
  • Summary of tax implications of incorporation
  • Income tax
  • Loss relief options
  • Capital gains tax
  • National Insurance
  • Corporation tax
  • More...

Incorporation ― introduction and procedure

Many businesses commence in an unincorporated form as a sole trade or a partnership. Start-ups benefit from the simplicity and low administration provided by a sole trader structure in particular. Relief for opening years’ losses are also significantly more favourable for sole traders and new partners. Even once a business has become established, operating in an unincorporated form has benefits and may continue to suit the proprietor(s) indefinitely.

However, there is a distinct path for growing businesses whereby incorporation becomes a natural step.

Key reasons to incorporate

The key reasons in favour of incorporation tend to be:

  1. limited liability allowing the mitigation of risks associated with expansion

  2. tax mitigation

  3. flexibility over income in respect of the timing and form of remuneration

  4. a reduced perception of the administrative burden due to familiarity with running a business

  5. a greater ease of attracting external investment

  6. prestige value

  7. certain tax reliefs are only available to companies, see the Calculating the tax benefits of incorporation guidance note

Limited liability means that the members of a company (ie the shareholders) cannot normally be held liable for the actions or debts of a company, though this is sometimes eroded by third parties such as banks, etc, who often require personal guarantees from the directors / shareholders in respect of the company’s overdraft or other borrowings. Limited liability can also be lost when the directors continue to trade when the company is insolvent. However, the protection of limited liability nonetheless remains extremely valuable. Limited liability can, alternatively, be acquired by trading through a Limited Liability Partnership (LLP, see the Introduction to LLPs guidance note) but a company offers a number of advantages over an LLP, including some tax advantages.

Many developing businesses find that limited liability becomes a more valuable attribute, especially once the business has taken on its first employees. Furthermore, once a business is running a small payroll, its owner will have become accustomed to dealing with administration, whether performed in-house

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