It is easy for small business owners to be persuaded to incorporate to take advantage of tax reductions and limited liability. However, there are many issues to consider.
I have listed below some of the negative aspects of incorporation which you may want to consider before taking this step:
Annual accounts have to be filed at Companies House and are available for public inspection as is other information about the company.
The penalties for late submission of these accounts can be significant. Formal meetings and minutes need to be kept on decisions to help protect the directors from personal liability.
There is far more compliance and regulation to deal with increasing the risk of penalties and mistakes in accounting.
A company is more complicated and costly to wind up.
Corporate accountancy fees are always higher than those for unincorporated bodies.
IR35 must be considered.
Taxation through a company may actually end up higher if it is found that the corporate entity is a personal service company, offering the services of one employee /owner.
There will be additional costs relating to compliance and returns for company secretarial matters, payroll, P11ds, and more sophisticated accounting records.
Any losses made by the company cannot be used against the owner’s other income; unlike a sole trader.
Applying for personal finance, such as a mortgage, becomes more complicated due to the nature of employee owner remuneration and dividends taken from a company.
Company cars: The tax burden of holding a vehicle in the business is significantly increased upon incorporation.
Surplus funds in the business can be used by a sole trader without any tax implications.
This is not so easy or tax-effective in a company as the company will pay a tax charge of 25% on any loans from the company drawn by the directors.
There are many complications that may arise when incorporating a business. Small business owners should understand all the facts surrounding incorporation before making this change.
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