New businesses are often started by one person, as a sole trader, or by two or more people in partnership.
Once the business has become established, it isn’t unusual for the owner(s) to ask “Should I incorporate?”
Incorporating a business means becoming a limited company. This means that Limited or Ltd will be at the end of the business’s name, although it can trade under another name.
So why do businesses incorporate?
First impressions! Although it doesn’t really mean that, many people think that a limited company is bigger. It can give weight to the impression given.
Customers. Some potential customers (particularly larger ones like local authorities) will only deal with limited companies. This is probably because they can find out more about the business owners by looking at Companies House.
Financial Security. In the past the owners’ liability should a company fail was limited to the amount they had paid for their shares in the company. Often only a few pounds. These days banks lending money to a limited company will typically require personal guarantees from the owners (directors) so this doesn’t apply fully.
Financial reasons. Depending upon the size and profitability of the existing business, incorporation may be a way to extract profits in a more tax-efficient way. Whereas a sole trader or partner is taxed on their share of the business income a director is an employee of a limited company subject to PAYE on their salary and dividend tax on dividends over the annual allowance.
Growing the business. It may also be easier to obtain funding as a limited company. If you need financial help to do this then you may find lenders are more likely to assist if you are trading as a limited company.
What are the disadvantages of incorporating?
Costs. Although the actual incorporation of a business is relatively inexpensive (we charge £250 plus VAT to form the company and tidy everything up afterwards), the ongoing costs are higher. Accounts, Corporation Tax returns, payroll, dividend vouchers, confirmation statements all add to your accountancy bill and / or your administration burden. Your insurance costs may well rise as you will now require employers’ liability insurance.
The limited company is a “separate legal entity”. If you want to withdraw money from the business you have to be paid it as a wage or a dividend. You can’t just take it out in the same way you can when self-employed.
Visibility. Limited companies have to file their accounts with Companies House meaning anyone, including your competitors, can view them. Rules as to how much has to be shown change. Restricting the details shown may be possible but will increase the cost of accountancy as for you to having meaningful accounts for your own use, two sets will have to be prepared!
You can find more information to help you at Companies House.
I’ve considered all the above and...
I’d like to incorporate, what should I do next?
Well, come and have a chat with us and we can confirm whether it does look like the right thing for you to do. If necessary we can arrange to form the company for you.
Forming the company is the first step. You may wish to add Limited (or Ltd) to your existing business name – so Rick’s Carpets becomes Rick’s Carpets Limited or you may wish to change the name to something different. Although most people trade using the limited company’s name this isn’t compulsory, so long as all your official documents show the limited company name and “trading as xxx”. In some respects it can be easier to change the name entirely – see below with regard to suppliers and customers. If you have lots of ongoing transactions at any given time ensuring that payments and receipts are made by and to the correct business can prove tricky.
It is worth planning ahead here. Once the company is formed you don’t have to start using it straight away. In fact some people incorporate a business using the name they want simply to protect it, in case they want to incorporate in the future. You are still required to file “dormant” accounts though so there is a cost to this.
Once the company is formed you will received a “Certificate of Incorporation”. You will need this in order to open a business bank account. Whilst an unincorporated business can operate using a personal account a limited company must not.
In the current environment it can be difficult to open a bank account and it may take a few attempts.
Once you have a business account you can start thinking about transferring the business to the limited company. There is a lot to consider and sort out before deciding upon the changeover date.
Do I have to transfer all of it? Well, no. Although we do generally recommend that you do it does depend somewhat on the nature of the business and your future plans. If a business has two (or more) distinct parts it may be worth only transferring part of it. Say, for instance, you run a café which also does outside catering. You may think that in the future you would like to sell the café as a going concern but continue to do the catering from home. You could transfer the café into the limited company but keep the outside catering as a self-employment. This will complicate the bookkeeping and increase your accountancy costs but it may be the best option for your personal circumstances.
Stationery etc. The company’s full registered name (and any trading as details) must be shown on all business letters, order forms, notices and publications, invoices, cheques, orders and on the company website. Letterheads, order forms and websites must also include the part of the UK in which the company is registered: England; England and Wales; Northern Ireland or Scotland or Wales, the company’s registration number and the address of the registered office. The latter may be the business address, the home address of a director or the accountant’s address (we charge a small annual fee for this service).
Although these days many businesses print everything onto plain paper rather than hold a stock of letterhead you need to consider whether you do need stationery and business cards printing.
Find out more on the Companies House web page: https://www.gov.uk/government/organisations/companies-house
If your current business has any bank loans or finance or received government grants or business support, including COVID support, you will need to check the paperwork on these to ensure that the business can be incorporated without this finance being settled. Similarly, any HP or lease agreements for assets used in the business will need to be checked and updated.
If the business premises are rented the landlord will need to be informed. If you own the property personally it is not normally transferred into the business but you will need to speak to any mortgage provider and advise them that you intend to rent it to a limited company. Do consult with us as to whether charging a rent is tax efficient.
Within your self-employment you may have charged mileage for use of your own vehicle in which case you can continue to do so as an employee. If there is a vehicle on the balance sheet of the business then private use of this will give rise to a tax charge. It may be better to keep the vehicle outside of the limited company. Again, speak to us first.
Personal use of vehicles within a limited company gives rise to an income tax charge on the user and a National Insurance liability for the employer. Generally a company van or electric vehicle is the most tax efficient company vehicle. For a new company these may not be affordable.
Buildings, vehicles, assets are all likely to be insured so make sure that you talk to your insurance company/broker to make sure everything is insured by the correct entity. The limited company will also need a new policy possibly including Employer’s Liability Insurance. If you will be a sole director then Employer’s Liability is not required but as the Health and Safety Executive (HSE) can fine you £2,500 per day that you are without the correct insurance it is well worth checking with your insurance company/broker.
You may need to register with HSE as an employer too and ensure that you display relevant information, or provide leaflets to your employees.
Please note that the definition of employees can be confusing. As a director you may be classed as an employee even though you won’t have a contract of employment. It is not a good idea to issue one of these to directors as it means having to comply with minimum wage regulations – not always possible when running your own company!
You may want to consider taking specialist advise about employment matters from a solicitor. Alternatively membership of an organisation such as the Federation of Small Businesses, your insurance company or our own Tax Investigation Service may give you free access to such assistance.
PAYE. The limited company will require a new PAYE system and workplace pension scheme. If you, as director, are going to draw a salary (of more than “a few hundred pounds” a month) you will need to be paid under PAYE too.
If you have existing employees who will transfer to the new business the existing business will make the employees “redundant” and issue P45s, which will then be used by the limited company. The employees will transfer under Transfer of Undertakings (Protection of Employment) Regulations (TUPE). This protects the worker’s rights, including length of service.
You’ll need to consider whether your current bookkeeping system will be suitable for the new business. Remember you will have to start a new set of books when the limited company starts to operate.
Suppliers. You will need to communicate with your suppliers to ensure they invoice the new company from the date it starts trading. This can prove quite difficult! You are likely to find you have go through all the paperwork connected with opening a new trade account, even if you have dealt with them for years.
Customers. They too will need advising of the change. In particular regular customers need to ensure they pay the old business for any bills outstanding when the new business commences.
Ensure you communicate the change in your advertising and social media. You may want to direct your old website to a new one or simply amend the details on your existing one if you have simply added limited to your previous name.
Phew! It is a lot to think about.
If it is something that is still of interest, do please make an appointment to see Steve to discuss it further.