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Breaking Barriers: Incorporated or Unincorporated – what you need to know

In our Breaking Barriers series, we put your questions to our team of growth and scaleup advisors. In this edition, we speak to Sam Rouse, Financial Consultant at BIC Innovation.

As a Financial Consultant Sam provides a range of services and advice, from supporting clients in obtaining debt/equity funding too internal controls and taxation.

Q: Should I be an incorporated or an unincorporated business?

A. This is a question that many businesses ask themselves. The way you structure your business will impact your administrative requirements, tax, drawings, liability, and several other issues.

What is an Incorporated Business?

An incorporated business is a legal independent entity from its owner. This means that it has its own legal standing, similar to that of a person.

What are some of the benefits of being incorporated?

  • Liabilities that are associated with this business are held by the business itself. This means that in the event that a company enters into administration the owners are not liable for the business’s debts (so long transactions have been performed on a legal and proper basis).
  • An incorporated business suffers corporation tax on its taxable profits and then when an owner draws money from the company this can be done via a payment of a dividend or salary. Dividend taxation is lower than employment tax and as a result an incorporated business is more tax efficient.

What are some of the issues of being incorporated?

An incorporated business is regulated and as a result there is applicable regulation that needs to be adhered to.

What is an Unincorporated Business?

An unincorporated business has no legal identity outside of the people who manage/own the company.

What are some of the benefits of being unincorporated?

  • An unincorporated business is not as highly regulated as an incorporated business and as a consequence there is a reduced level of administration.
  • In the event your unincorporated business generates losses these losses are able to be deducted from other forms of income (such as employment income). This means your taxable income is lower and therefore tax liability. An incorporated business’s losses are not transferable to an owner’s other sources of income.
  • An unincorporated business information does not need to be published on companies house and therefore business information can remain private.

What are some of the issues of being unincorporated?

  • An unincorporated business is taxed on profits as employment income regardless of the level of drawings within the business. This means you will be taxed irrespective of the amount of money that is taken out of the business. Further to this the tax on employment income is greater than that of dividend income, dividend income is only available from an incorporated business.
  • The liabilities of an unincorporated business are unlimited and as a result if a company is unable to meet its debt when it falls due the liability will have to be paid by the owners/managers of the business.

What should you do?

Every business is different and determining whether to run an unincorporated business or incorporate the business will be specific to the business’s circumstances. If you would like further advice surrounding what you should do please contact Sam Rose who will be able to assist you.

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