Dangers of Incorporating a Business

Incorporating a business, whether as an LLP or a limited company, can offer several advantages, including limited liability protection and potential tax savings. However, potential dangers and tax consequences also need to be considered.

Dangers of incorporating a business:

1. Increased administrative burden: Incorporating a business requires more paperwork and regulatory compliance, such as filing annual accounts, submitting corporation tax returns, and maintaining company records.
2. Loss of privacy: Limited companies and LLPs must publicly disclose certain information, such as director or member details, registered office address, and annual accounts.
3. Additional costs: Incorporation can involve additional costs, including accounting fees, company registration fees, and ongoing regulatory fees.
4. Potential impact on tax reliefs: Incorporating a business might affect certain tax reliefs, such as Entrepreneurs’ Relief (now Business Asset Disposal Relief) or other capital gains tax reliefs, as the ownership structure changes.

Tax consequences on income or gains:

1. Corporation tax: Limited companies are subject to corporation tax on their profits, while partners in an LLP are taxed individually on their share of the partnership income. The corporation tax rate may be lower than the individual income tax rate, potentially offering tax savings.
2. Dividends: Company owners can take income as dividends, which may be more tax-efficient than a salary, as dividends are taxed at lower rates and not subject to National Insurance contributions.
3. Capital gains tax: When a business incorporates, the transfer of assets or shares may trigger capital gains tax liabilities. However, some tax reliefs, such as Incorporation Relief or Holdover Relief, may be available to defer or reduce tax liability in certain situations.

There is no fixed “optimum level of income” when a taxpayer should consider incorporating their business to save tax. Instead, the decision depends on various factors, such as the taxpayer’s tax situation, the nature of the business, and its projected growth. Therefore, professional advice from an accountant or tax adviser should be sought to determine the best course of action for each specific situation.

Incorporating a business can be a legitimate tax planning strategy if done with a genuine commercial purpose and not solely to avoid tax. Tax planning involves organizing your financial affairs tax-efficiently within the bounds of the law.

You can call us to discuss your personal circumstances with our specialist tax advisors.