Benefits of Incorporation

1. … Contemporary Practice… Established Values Supporting Andrew Reid & Partners in its growth, now and in the future The Benefits of Incorporation…
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  • 1. … Contemporary Practice… Established Values Supporting Andrew Reid & Partners in its growth, now and in the future The Benefits of Incorporation
  • 2. 2 … Contemporary Practice… Established Values What business entities can I trade from? The types of business entities chosen by our clients are as follows: Sole trader Individual trading on their own in their own name i.e. ‘one man band’ Partnership Trades similar to a sole trader but with more than one individual sharing business profits Limited Liability Partnership Trades exactly the same as a partnership but importantly with Limited Liability It is generally an entity used by professional services Limited Company Separate legal entity to the individuals that manage and trade within Offers many commercial and tax based advantages
  • 3. 3 … Contemporary Practice… Established Values What are the commercial advantages to trading through a Ltd company?  Limited Liability Safe guarding your assets Personal assets are not at risk if the company and directors have acted within the law  Perception in the market place Limited company status provides gravitas Perceived business size  Supplier confidence Linked to the business perception Transparent business records  Ability to raise finance Credit scoring ability  Future business sale The business shares can be sold easily Ties with business owner are not intrinsic
  • 4. 4 … Contemporary Practice… Established Values  Key employee incentives Perception of job security and stability Availability of share schemes to retain key staff  Management structure Management can be separate to business ownership  Stability & continuity A change in business owner does not necessarily affect the business going forward What are the organisational benefits of trading through a Ltd company?
  • 5. 5 … Contemporary Practice… Established Values What are the tax advantages when trading through a Ltd company?  Corporation tax versus income tax and national insurance  The ‘family’ company  Timing of income  Maximising benefits in kind  Goodwill (for switchers)  Enhanced tax relief under certain government schemes
  • 6. 6 … Contemporary Practice… Established Values Corporation tax versus Income tax and National Insurance (from April 2013)  For unincorporated entities:  Income tax rates are 20%, 40% and 45%  National insurance rates are 9% and 2%  For incorporated entities:  Corporation tax rates are 20%, 23.75% and 23%  Dividends to the business owners are 0%, 25%, 36.11%  Examples showing tax saving by trading through an incorporated company:  Business profits of £20k : saving of £750  Business profits of £40k : saving of £2,551  Business profits of £60k : saving of £3,898 or £6,763
  • 7. 7 … Contemporary Practice… Established Values The ‘family’ company  Maximising tax planning opportunities:  Husband and wife teams  Do the children work for the company?  Example to show the overall business tax, personal tax and national insurance:  An unincorporated business making profits of £80k: £25,624  A company making profits of £80k (pre family income) with one business owner on £8k salary the rest being dividends: £20,493  As above with share ownership being 50% Husband and Wife on £8k salaries, employing 2 children (of working age) for a part-time salary of £8k per annum: £9,845  Grandfathering shares to children for retirement planning
  • 8. 8 … Contemporary Practice… Established Values Timing of income Paying tax on income rather than profits…  An unincorporated business pays tax on profits in the year that they arise  Problematic when say year 1 = £60k profits and year 2 = £20k profits  Overall tax for these 2 years: £20,436  Income is drawn from an incorporated business and therefore income can be smoothed across see-saw years  Overall tax for these 2 years: £12,922
  • 9. 9 … Contemporary Practice… Established Values Maximising benefits in kind  Including personal benefits through the Limited Company For example: dental costs Cost to the company £1,200 Business tax saved £240 £960 Personal tax cost £240 Effective cost £1,200 Cost to individual £1,200 Tax & NI paid £564 Salary required £1,724 Saving £564
  • 10. 10 … Contemporary Practice… Established Values Goodwill (for switchers)  Opportunity for those incorporating from a sole trader or partnership  Hugely tax efficient  10% tax rate for individual on sole trader business value
  • 11. 11 … Contemporary Practice… Established Values Enhanced tax relief under certain government schemes Certain tax opportunities are only available to Limited Companies:  Research and Development tax credits  Patent box (10% effective tax)
  • 12. 12 … Contemporary Practice… Established Values So…. Are there any disadvantages?  Increased administrative requirements  Costs One off costs Annual costs Legislation Directors duties & responsibilities Companies Act Publically available business records Business losses Greater flexibility in unincorporated businesses  Incorporation is one way (for now)…
  • 13. 13 … Contemporary Practice… Established Values Thanks for listening!
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