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Incorporation is the process of registering your UK business as a limited company. Registering your business in this way gives you and your business a distinct separation, which contrasts with being a sole trader. Your business will gain its own legal status separate from yours, which is a huge benefit for entrepreneurs. This article explores key reasons you should incorporate your business in the UK.
Legal Separation Between You and Your Business
Incorporating your small business is important from an asset protection perspective, often referred to as limited liability. When you register your business with Companies House, your business becomes a limited company. Accordingly, you create a separate legal identity for it. In simplistic terms, you and your business are treated as legally separate entities. It follows that your personal assets are protected against potential liabilities that can occur with your company.
Having separate legal personalities means that your business, rather than you, is treated as the entity that enters into contracts with third parties, like:
- consumers;
- lenders; and
- investors, etc.
For example, as a shareholder in a company, you would not be liable for the business’ debts. If the company went bankrupt, creditors would be unable to claim your personal assets to offset the company’s debt. The creditor would be limited to claiming assets owned solely by the business.
When your business is new or growing, it is important to consider incorporation, even from this singular aspect. Right now, you might just be starting operations from your home and entering contracts worth less than $1000 at a time. However, as your business grows, demand for your goods might increase, leading you to enter agreements worth tens of thousands of dollars. Accordingly, incorporating your business can be a preventative step against losing any/all personal financial resources should the worst happen.
Shareholders within a Private Limited Company
When you incorporate your business, you issue shares to shareholders who will be the owners of the company. This contrasts with a sole trader who would own their business as an individual. In addition, having access to shares can provide your business with an income generator, as you can raise capital through issuing new shares.
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Reputational Benefits of a Limited Company
When you incorporate your business within the UK, your small business can gain credibility and reputational advantages. This is because incorporation boosts your legitimacy in the eyes of consumers and lenders. Likewise, your private limited company could potentially receive greater access to business loans. You could open new business bank accounts and take loans out under your corporation‘s name rather than your own.
Tax Benefits
When you become a limited company, your legal obligations change in relation to tax. As a sole trader, you will be subject to income tax rates and national insurance. All income will be treated as your own and will be calculated using your self-assessment tax return. In contrast, a corporation will pay corporation tax on any business profits they have made.
As a director, you will still have to pay income tax. However, you will likely have a small salary, with most of your income coming from dividends you do not pay national insurance on. Therefore, depending on your company’s structure, there can be tax benefits when contrasted with continuing as a sole trader. It is important to always seek professional advice to ensure you are meeting all tax obligations.
Lifespan of an Incorporated Business
Sole trader businesses are intrinsically linked with their owners as their legal identities are the same. When a sole trader passes away, their business will usually die with them. In contrast, a limited company does not die when a shareholder dies. Shareholders can typically pass on their ownership either through inheritance or transfer of their share via sale like any other piece of property.
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Key Takeaways
Incorporating a business in the UK can be beneficial for any business. The main reason to incorporate is to protect your personal assets. Once your business becomes a limited company, you and your business are treated as separate entities with distinct legal personalities. Simply put, if the business fails, your personal assets will be protected. You might also gain tax benefits depending on how your company is structured, as limited companies are subject to different tax obligations than sole traders who pay income tax.
If you need help or advice around incorporating your business, our experienced business 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
Incorporation is the process of registering your UK business as a limited company. Registering your business in this way gives you and your business a distinct separation, which contrasts with being a sole trader.
Incorporation is beneficial from an asset protection perspective. Once your business becomes a limited company, you and your business are treated as separate legal entities with distinct legal personalities. You may also be able to gain tax benefits depending on how your company is structured, as limited companies are subject to different tax obligations than sole traders who pay income tax.
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