What Is Incorporation?
Incorporation, in business terms, means setting up a legal entity distinct from yourself. It can be an LTD, LLP, LLG, LLC etc.
'Incorporation' is derived from the Latin root 'corpus', meaning body. You are creating a new body. The body is a company. A company is a group of people. This body can effect legal acts and is subject to local laws.
So a group of people want to set up a body distinct from themselves. Why would they do that?
Well, once reason is to have a legal entity that will survive any one individual member. A member dies or leaves, the company lives on.
Another is personal protection from lawsuits. If the company gets sued, directors and shareholders don't lose their homes(!)
Making deals: the company can enter into contracts by itself, without the directors being on the hook personally to fulfil them. Suppose Joe Director has a personal crisis? Too bad, the deal goes on.
Taxation. Having a company means it is taxed directly, and not you. This gives more room to manoeuvre with your tax authority.
Marketing. You look more professional.
Raising funds. You can sell shares to raise more money for business deals.
Trade shares. Ownership of the company can be diluted or transferred using shares. You can't do that with a mere trading name.
- Any downsides?
Well, it's more paperwork. You have to submit annual returns. These can be a chore, so we recommend you keep records of your finances in a spreadsheet and keep it simple, so your accountant can submit your returns in good time. Don't be the guy who turns up at his office two weeks before the deadline with a shoebox full of paper receipts.
Cost. Paperwork costs time and labour. The company facade must be maintained. You're not Joe Soletrader working from a shed and giving out ad-hoc paper receipts any more.
Bureaucracy. You have to have more meetings, so as to abide by basic regulations. Minutes need to be kept.
- When incorporate?
When you really need to. You'll reach a point where it's the smart move.
Typically, sole traders realise that if they screw up in their business they are going to be sued, personally, and that's not a good feeling. Another reason is that your account tells you it's a good idea, for tax purposes.
You get taken more seriously if you're a company. It's hard to quantify, but being a sole trader keeps you on the level of a tradesman, some guy working from home, whereas a company makes you look, on paper, like any other corporation. You get to have a facade between you and the wicked world out there(!)
Your business is then only as 'pro' as you present it to be. Get a separate, local phone number with a voicemail message, get a mailing address for it, get a website, maybe get a small amount of headed notepaper made ... bingo! You look just a professional as anyone else.
- What do I need?
You will typically need to decide who is to be director and shareholder, where it is to be based legally, what the shareholding is to be, what the name is to be and what type of company you will set up.
We do not recommend that you do this lightly. Companies are easy to set up in the UK but a bother to maintain, if you are a one-man-band. They are not a toy. If annual returns are not submitted on time your company accrues fines. While these don't apply to you personally, they are irritating and they are publicly associated with your name as director.
On balance, however, it's better to have a company. We might say that, for our own purposes, but it's, overall, much better conducting serious business without the potential of litigation hanging over you.
Some tradesmen, like plumbers, people expect to deal with a lone guy and deal in cash. Everyone else eventually realises they have to 'go pro' and get a company going if they want to improve and grow their business.
To incorporate a company now, go to https://www.registeredaddress.co.uk/company-formation/
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