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For a budding entrepreneur, getting the timing right when incorporating your business is essential. Incorporating at a good time can provide you with numerous advantages, give you an edge over your competition and allow your business to hit the ground running. Market forces and your commercial objectives are key factors in establishing the optimum incorporation moment. When assessing whether to incorporate your business, you must first understand the pros and cons of operating and trading through a company and reflect on your business aims and growth stage. This article will discuss key factors when establishing when to incorporate a private company limited by shares.
Benefits of Incorporating
Incorporating can provide numerous benefits and is a key step in growing your business, including:
- limited liability protection for shareholders;
- tax advantages; and
- a more professional image.
The timing of incorporation is crucial, as it can significantly impact your business’s growth, operations, and financial stability. Incorporating at the right time is paramount to giving your fledgling business a strong start.
Considerations Before Incorporating
Business Growth Stage
When considering incorporating, you must first assess the stage of your business. If you are generating small amounts of revenue and your business is not your full-time job, incorporating it may not be necessary. Incorporating a company in the UK costs £50, and you must produce annual accounts and meet various reporting requirements set by Companies House. This additional administrative workload may not be worth your time, given the returns you receive and your other commitments.
Additionally, operating as a limited company is essential for seeking outside investment or expanding into new markets, as your company essentially becomes its own legal entity. It is highly unlikely that investors will provide funding under any other business structure. This is because, under a company structure, investors are given shares and allowed to vote on key corporate governance and operational issues. No formal procedures allow an investor to have a say in the business of an individual sole trader.
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Business Goals
It is important to factor in your business goals when considering if and when to incorporate.
If you are about to enter a big contract with a risk of incurring large liabilities, you may want to incorporate to limit your personal liability. By creating a separate legal entity, you can:
- facilitate easier transfer of ownership;
- protect your personal assets from business liabilities; and
- streamline the process of raising capital or bringing on new partners or investors.
This means that if you enter a contract and something goes wrong, only your business assets will be at risk. This applies unless you have breached your director’s duties under the Companies Act 2006. Your individual assets, such as property, will be safe as your business is the party bound by the contract, not you as an individual.
If you operate in a high-risk industry where lawsuits are common, you should consider incorporating before you start trading.
Additionally, some types of insurance are only available to companies. You should consider the types of insurance you will need in your industry. If they are only available to companies, you may need to incorporate.
Tax
Incorporating can also significantly benefit your business, as corporation tax is lower than income tax. As a sole trader, any profit your business makes is subject to income tax. However, when you incorporate, profit is subject to corporation tax and any dividends you pay yourself may also be taxable.
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Key Takeaways
There is no one-size-fits-all answer for when you should incorporate your business. The ‘right time’ depends wholly on your circumstances. You must understand incorporation’s benefits and weigh them against your business aims. For example, if you want to expand internationally or acquire funding for your business, incorporating is a good idea as you are more likely to attract investment. Additionally, if you are operating in a high-risk industry, incorporating will allow you to distinguish your personal assets from your business and protect yourself from liability.
If you are looking to incorporate your business, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Incorporating your business can provide several advantages, including limited liability protection for shareholders, tax benefits, and a more professional image. By forming a limited company, you create a separate legal entity and protect your personal assets from business liabilities.
You must first choose a unique company name, register with Companies House, and prepare a memorandum and articles of association. Then, you should appoint at least one director and ensure that your company complies with the necessary reporting and tax obligations.
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