Now as corporation tax rates are significantly lower than income tax rates all businesses need to consider incorporation. So apart from saving money are there any other benefits to incorporation and what are the practical issues that a business needs to consider before taking the plunge?
Benefits
- Reduction in tax bill – this article does not intend to cover the calculation but a table of potential tax savings on incorporation for 2011/2012 can be found in Rebecca Bennyworth’s article at Tax Adviser.
- Limited liability. This was originally the main reason for incorporation and served to protect the owner’s personal wealth and assets should the business fail. However, banks now demand personal guarantees of directors such that the value of Limited liability has eroded.
- Different categories of shares can enable different levels of payment to be allocated; advantage being taken of the different personal tax circumstances of individual shareholders.
- Dividend waivers enable transfer of income – possibly from a higher rate tax payer to lower rate. Not possible to transfer income of self-employed unless a partnership is formed.
- IHT Planning – a company enables greater flexibility; on death the company continues to exist as a separate legal entity.
- Depending upon the type of business it might prove easier to sell shares rather than the business and business assets if not a Limited company.
- Where the business property is held outside of the company in the directors name the director can extract funds from the company in the form of rent – no PAYE or NIC issues. There will usually be a mortgage such that rental income will ensure immediate tax relief for interest paid. However no Entrepreneurs Relief is available on the sale of the property as it will be regarded as an investment property.
- If a sole trader has overlap relief (because they have a year end not on 31 March) incorporating will enable them to take the benefit rather than having to wait until they cease trading.
- Transfer of trading loss is available.