Setting up a new business is an exciting and challenging process. An important step for a growing number of businesses is incorporation, the process by which a new or existing business registers as a limited company. In this context, a company is a legal entity with a separate identity from those who own or run it. And the vast majority of companies are limited liability companies, which means that the liability of the members is limited by shares or by guarantee.
First things first
A business cannot operate as a limited company until it has been incorporated at Companies House under the Companies Act 2006. Directors are required to file certain documents every year such as annual accounts and a confirmation statement. They must also inform Companies House about any changes, such as the appointment or resignation of directors or a change to the company’s registered office.
Who? How? When?
So who can apply for incorporation? According to Companies House individuals, companies and other bodies can all apply. And there are four main types of company:
- Private company limited by shares
- Private company limited by guarantee
- Private unlimited company
- Public limited company
You can apply for incorporation in three ways: electronic software filing, the Web Incorporation Service, and paper filing. Electronic applications are usually processed within 24 hours, paper incorporation usually takes up to ten working days to process. According to financial information firm Experian, last financial year Companies House incorporated over 644,000 companies, 99% of those were online and 1% on paper. However, over 8% of online applications to incorporate and nearly 53% of paper applications were rejected. The most common reasons that applications were rejected are thought to be straightforward mistakes made in the process that can be easily avoided.
Some Advantages of Incorporation
- It can provide limited liability.
- A company enjoys legal continuity – it can own property, sue and be sued.
- Effective ownership or part ownership of the business may be readily transferred.
- Growing businesses can re-invest profits after a corporation tax charge of 19%.
- Greater flexibility is afforded to directors and shareholders over the timing of drawings and how and when they are taxed.
- A bank can take extra security by means of a charge over the assets of the company, and this will increase the amount that can be borrowed, beware though if a personal guarantee is asked for by the bank, it will reduce the benefit of limited liability.
- External investors may be entitled to tax breaks.
- Shareholders can be paid in dividends (currently free of NICs).
- Accumulated funds could be withdrawn on a sale of shares with the benefit of capital gains tax (CGT) entrepreneurs’ relief.
- A company can establish a registered pension scheme.
- A company can incentivise staff through tax-advantaged share options.
- Employees may be offered an opportunity to buy their own stake in the business.
Some Disadvantages of Incorporation
- Formation of a company incurs costs, which may include new accounting records and systems, new PAYE system, new business tax reference, new VAT registration, requirement to file a corporation tax return, new stationery etc.
- Company directors have legal responsibilities.
- Customers, suppliers and service providers must be informed of a change to limited company status.
- The tax position arising on the incorporation of an existing business needs careful analysis, the timing and effect of cessation on income and capital gains tax must be closely planned.
- Annual accounts must comply with the requirements of the Companies Act. In most cases, a statutory audit is not required for companies but companies must be aware of the possibility of an audit.
Foxley Kingham has a low-cost service of just £150 including VAT and disbursements to register a new company at Companies House. Get in touch today to find out more.