Incorporation too much hassle?

Jun 10 2008 by Karen Dent, The Journal

TO many, the incorporation side of forming a company coupled with the on-going annual requirement to file returns with Companies House makes the process seem like too much hassle. Surely it is just as easy to run a business without the additional administrative burden of ensuring that the company constitution is legally compliant?

In the dim and distant past there used to be tax advantages in running a business as a partnership for a number of years until it was big enough to merit being incorporated. In many ways it was an easier decision for business owners because it was a straightforward balance of looking at the tax benefits versus the ability to limit liability. Essentially when a business grew to a size where the owner felt his personal assets could be at risk, the choice to incorporate seemed easier somehow.

While the tax benefits of remaining unincorporated have diminished, the issues over personal liability (and, worse still, joint and several liability) remain. However, without the tax driver, whether to incorporate or not now seems to be one of indifference.

It is worth revisiting the basic liability concerns before looking at practical benefits of incorporation. In simple terms, if you trade as a sole trader you can be personally liable for the debts of your business and could lose personal assets if something goes wrong with the business. If you trade as a partnership you can still be personally liable, but you can also be jointly and severally liable for the debts of your partners.

The benefit of a company limited by shares is that your liability is limited to the nominal value you paid for your shares. So if you paid £1 for you shares, your liability is limited to £1. On a practical level there are benefits:

∙ Institutions and other companies find it easier to deal with a company (as your records are public).

∙ It is easier to demonstrate a trading history.

∙ The likelihood, when selling the business, is that a company is more saleable.

Put in that context, the administrative burden of a company structure does not seem that bad.

Neil Warwick is a Partner is the Company & Commercial Department at Dickinson Dees LLP