INCORPORATION

With the falling rates of corporation tax and the increase in Class 4 NIC, is now the time to incorporate?

 

Table 1 : TAX & NIC burden self-employed to Limited Company 2011/2012

 

Table 2 : Tax savings on incorporation 2009 – 2012

Profit	2009/2010	2011/2012	Saving
£10,000	£274	£299	£25
£15,000	£624	£749	£125
£20,000	£974	£1,199	£225
£30,000	£1,674	£2,099	£425
£40,000	£2,374	£2,999	£625
£50,000	£3,710	£4,257	£547
£75,000	£3,772	£4,757	£985

Table 2 highlights the increase in tax savings whilst trading as a Limited Company following the decrease in corporation tax rates.

Table 3 : Future rates of corporation tax rates

Profits	Year starting 1st April
	2010	2011	2012	2013	2014
Up to £300K	21%	20%	20%	20%	20%
£300,001 - £1.5M	29.75%	27.5%	26.25%	25%	23.75%
Over £1.5M	28%	26%	25%	24%	23%

 

Further advantages of trading as a Limited Company

• Legal personality
  An incorporated business is a legal entity in its own right. This means that it can enter into contracts, employ staff, lease property and have its own obligations and liabilities.
  
  
• Limitation of risk
  Incorporation limits the personal liability of the individuals involved. Incorporation is an important consideration if the organisation intends to employ any staff, take on significant property interests or undertake major contractual obligations.

 

• Clear ownership structure/governance
  Unincorporated organisations can operate relatively informally, being governed only by their constitutions. However, this means the powers and processes for decision making can be unclear. Incorporation involves the formalisation of governance structures within a legislative framework.

 

• Developing a sense of ownership
  Incorporation provides an established formal structure for some types of stakeholder involvement.

 

• Public accountability
  With limited liability comes regulation and disclosure requirements, which can increase public confidence in the company. Limited companies have to have a registered address, file their constitutions, annual accounts and prescribed details of their directors etc.
  
  

• Recognition by financial institutions and investors
  Many banks and financial institutions will insist on incorporation before providing loan finance.

 

• Availability of equity finance
  Equity finance is only available to certain types of incorporated organisations. If you want to raise equity investment, your organisation will have to incorporate.

 

"Incorporation provides an established formal structure for some types of stakeholder involvement."