Understanding Unincorporated Businesses | Jackson Stephen

Understanding Unincorporated Businesses

4 mins

Are you operating your business under the right ownership structure?Many owners of unincorpo...

By Steve Crompton

Partner – Head of Tax

Are you operating your business under the right ownership structure?

Many owners of unincorporated businesses (sole traders and partnerships, including LLP’s) remain unaware of the significant tax and commercial advantages associated with transferring their business operations into a limited liability company (“Incorporation” as it is known).

Incorporation has been a popular form of restructuring for many years, spanning different Governments and tax regimes, and it is arguably still an attractive option now, for reasons outlined below.

There are a host of advantages associated with incorporation which, individually or taken together, can yield significant benefits.

With most of our tax planning solutions for trading businesses, we aim to achieve at least a number of the following:

  • Limited liability protection for the owner;
  • The immediate realisation of “overlap relief” for the owner (this can also be useful for cashflow management);
  • The replacement of profits which are currently subject to class 2 and 4 national insurance with future profits which suffer no national insurance at all;
  • Business profits are taxed in the company at only 19% instead of 45% for an unincorporated business;
  • The establishment of corporate status and a low initial value of shareholding on incorporation, which are both conducive to the use of a commercially-effective, share option scheme for key employee(s);
  • A structure more typically understood and operated by potential future buyers;
  • Increased options as to how a future sale of the business might be structured in the most tax-efficient way.

Trading businesses are not the only vehicle for which incorporation can be financially advantageous – it is possible to incorporate investment businesses (property holding businesses, particularly) for short and longer-term tax savings as well. Investment businesses typically involve a different method of incorporation, with different (but nevertheless still attractive) consequences.

Incorporation involves a range of commercial, legal, and tax technical aspects, all of which need proper care and attention to enable the owner to get the most benefit available and to manage the process with minimum administrative fuss.

At JS we have advised upon, designed, and implemented, many different ways of incorporating our clients in a wide range of industries and business circumstances. For a relatively small investment, it has been possible to secure significant immediate and ongoing tax savings while creating commercially desirable ownership structures at the same time.