New Year, New Structure?
Date: 24/12/2019 | Corporate
As we start a new year with plans for 2020, one of the things we know some of our clients are thinking about is how to grow their business and how to manage the risks associated with that growth.
At some point, all businesses reach a size where they should consider incorporation and we are often asked what the pros and cons are. Whilst every business is different, this is the general advice we give:-
1. Limited Liability
The key point is that running your business through a company gets you limited liability. Unlike being a sole trader, where the business owner takes on all the liabilities, when a business becomes incorporated, an individual shareholder’s liability is limited to the amount he or she has invested in the company.
As a sole trader, your personal assets, such as your house and car can be seized to pay the debts of your business but as a shareholder in a company, you can’t be held responsible for the debts of the corporation unless you have given a personal guarantee (which is to be avoided if at all possible).
2. Companies Don’t Die
As a sole trader, if you die, the business automatically ceases to trade and becomes part of your estate. A company has an unlimited lifespan; it will continue to exist even if shareholders or employees die or leave the business, or if the ownership of the business changes making continuity much simpler.
3. Raising Money is Easier
It is easier for a company to raise money, which in turn may allow your business to grow and develop more quickly. A company can borrow and incur debt just like an individual can but it can also sell shares to raise equity capital, a big advantage because equity capital generally does not have to be repaid and incurs no interest. Of course, by issuing shares to other people, you are reducing your percentage of ownership of the company and taking other people’s money always comes with strings attached but a corporate structure does give you that option.
4. Income Flow
If you incorporate you can determine when you personally receive income which can be a big tax advantage. Instead of getting your income when it’s received as you do as a sole trader, being incorporated allows you to take your income either by way of dividend, salary or bonus at a time suitable to you and do some tax planning.
5. Income Splitting
Companies pay dividends to their shareholders from the company’s earnings. A shareholder does not have to be actively involved in the business activities to receive dividends. Your spouse and/or your children could be shareholders in your company and receive dividends on the shares they own, giving you the opportunity to redistribute income from family members in higher tax brackets to family members with lower incomes that are taxed at a lower rate.
6. Increased Business?
Being a limited company may increase your business, as many people perceive companies as being larger and more stable organisations than unincorporated businesses. Many companies and public bodies will only do business with limited companies, because of liability and reputational issues so being incorporated might allow you to access a new customer base.
Incorporating your business is something worth thinking about. A new structure might make 2020 an even happier new year.
