Earlier this summer the Chancellor announced fundamental changes to the taxation of dividends from shares held in limited companies. These changes will become effective in the next tax year starting 6th April 2016 and will mean that many shareholders will have higher income tax bills to pay. Owner-managed companies pay dividends as a more tax efficient method than say profits from a partnership or sole trader. With the tax saving offered by dividends set to reduce under the new rules is incorporation still an attractive proposition?
There is more to running a business than saving tax. It is often said that tax shouldn’t be the reason for business decisions but instead should be taken into account when considering how to achieve your goals and objectives. You wouldn’t invest in new equipment unless you had a commercial need or use for it. However, you might select energy efficient equipment qualifying for enhanced tax allowances if that made the numbers more advantageous. On the other hand you might simply select energy efficient items for reasons of corporate social responsibility.
Limited companies will still offer strong tax planning advantages over partnerships and sole traders despite the obvious tax saving on dividends set to reduce. Aside from tax the other advantages of running your business through a limited company include:
Limited liability status – good insurance policies go a long way to protect you from the consequences of unfortunate events but what if an employee, member of the public or customer had a claim against you that wasn’t fully covered? In most cases the claim would be against the company and not the owner personally thus protecting personal assets such as the family home. Compare this to partnerships where partners are personally, jointly and severally liable for their shared business. One partner’s mistake could lead to another partner being sued.
Professional image – limited liability status may be perceived by some to indicate a more established and professional business. This can help with marketing.
On the other hand there are disadvantages to limited companies. . .
Companies are registered at Companies House where records are open to inspection by members of the public. This means that restricted details about the identity of the directors, shareholders and the company itself are in the public domain and freely available on the internet. This includes annual financial statements. Small companies are only required to file simple financial statements with far less detail.
It can take time for a new company to build up a track record and credit rating. This can make raising finance more challenging if required during the early stages. This applies to the incorporation of a long established business as well as a new start-up.
Companies and directors must comply with the Companies Act and Corporation Tax legislation. The rules affecting directors and shareholders are more complex and in particular care should be taken to observe the distinction between company and private assets and transactions. These rules also bring what is commonly referred to as additional “red tape”.
Deciding which legal form is right for your business is a personal choice. Accountants are trained in this area and good accountants will be only too happy to guide you through this process.