If you’re currently self-employed, you may be wondering whether incorporation could benefit your business, and indeed when you should incorporate.
Nearly 900,000 companies were incorporated in 2024 – an 11.2 per cent increase compared to 2023 – and it is certainly true that incorporation offers the best structure for many businesses.
However, for its advantages – including limited personal liability and greater credibility in the eyes of investors –, there are also drawbacks to consider alongside the timing of your decision, the legislative environment and the commercial, tax and practical issues arising.
If incorporation could be on the cards for your business in 2025, here are a few of our top tips to get you thinking.
Research
The decision to incorporate your business, and so transition from sole proprietorship to running a limited company, should not be taken lightly.
Whilst establishing your business as a separate legal entity limits liability if things go wrong, it does come with initial start-up costs, some strict compliance requirements and a raft of new responsibilities, which you need to prepare for.
Tax-efficiency should always be a key consideration where incorporation is concerned, but there will be lots of variables at play here and so we would always encourage you to seek professional advice.
Paying yourself
As a director, you can withdraw funds in the business either by paying yourself a salary, or declaring dividends from the company, or you can combine the two to maximise your take-home pay.
The most efficient approach is often to pay yourself a lower salary, so you are not liable for Income Tax or National Insurance Contributions (NICs), but still contribute enough towards your state pension, and to take the rest as dividends, which is subject to a lower tax rate.
However, you should bear in mind that your ability to withdraw a dividend from the business is impacted by overall profitability.
Structuring your company
When considering the structure of your company and especially the share type, there are several key aspects that must be planned for and handled carefully.
You will need to define how dividends are declared and voting rights attached to each share class.
As part of this process, you will need to address how the shares and shareholder rights align with the company’s Articles of Association.
Open a business bank account
It’s advisable to open a separate bank account for your business transactions as soon as possible.
Some founders make the mistake of thinking they can mix personal and business finances early on, but it makes applying for reliefs and paying taxes more complicated as you must be able to detail exactly what you have spent through your business and when.
Keeping business and personal finances independent of one another can make it easier for you to maintain good records.
If you use accounting software to aid in managing your finances, you will likely be able to sync it with your business banking and so benefit from the efficient flow of information that this affords.
Treat your business like a separate entity (because it is)
If you plan to inject personal funds into your company or to take money out, you should do so through a Director’s Loan Account.
You will need to keep details of each transaction going in and out of the business and avoid taking out excessive funds which could be called into question by HM Revenue & Customs (HMRC).
If you are considering incorporation, you should seek professional advice and ongoing support to ensure compliance and tax-efficiency.
Ready to take the next step? Contact us today for expert advice on incorporating your business.
