“Should I incorporate my business?”

Q: "Should I transfer my sole-trader business to a limited company?"

A: This is a frequently asked question, and there are a number of good reasons why I recommend that my clients incorporate their businesses. The key benefits of this are:

Save tax The amount of tax saved by operating through a limited company, rather than as a sole-trader, has reduced in recent years. However, for most businesses, they will still be a couple of thousand pounds better off using a limited company, even allowing for some additional accountancy costs that may result from a limited company.Reduce risk By operating through a company your liability to third parties is limited. Operating as a sole trader means that liabilities of the business belong to you personally, so any assets you own (such as your home, your car, and so on) can be claimed by creditors if things go wrong.

I recently advised a window fitter who didn’t think this protection was much use to him. He pays all his suppliers immediately, so has minimal liabilities at any point in time. Then I asked him what would happen should his suppliers (he buys the window units direct from the manufacturers) hit hard times and decide to use cheaper and – unbeknown to him – substandard materials to cut costs? When all those windows that he has installed (and provided ten-year guarantees on) fail, it is him that the customers will be suing, not the manufacturer. A few claims like this could put him out of business overnight.

Increased credibility People often prefer to deal with a limited company rather than a sole trader because they think that the business is more established and more substantial. The fact that they can obtain information about your business from Companies House, which they can’t do for a sole trader, gives them a greater level of comfort to do business with you. This applies to both customers and suppliers.

Clearly there can also be some draw-backs to being a limited company, but it is important to recognise that there are some very strong, commercial reasons for considering this option and that it’s not all about saving tax.

Martin Dunne is a partner at Sayers Butterworth LLP. He previously worked in the entrepreneurial services division of Ernst & Young, and has over 15 years of experience working with fast-growing, entrepreneurial businesses. He provides practical and commercial advice to clients ranging from start-up stage to AIM-listers in a variety of sectors including retail, property, manufacturing, technology and media.

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