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Reviewed by
Chris Andersen
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Reviewed by Chris Andersen

Chris is a licensed Insolvency Practitioner, regulated by the IPA since 2014. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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28th November 2022

If you currently run a sole trader or a partnership, then there’s every chance you’ve taken a look at the possible tax perks of incorporating your business and decided now is the time to become a limited company.

The actual act of transferring the trade and assets of your business to a limited company is a relatively simple one if you follow these steps, and the potential benefits are well worth the extra time this will take.

When a small, owner-managed business becomes a limited company, the owner of the company becomes the shareholder and director. This is the structure of many one-man consultancy businesses, which are set up predominantly so the director can withdraw money from the company in a more tax efficient way, usually in the form of a small salary and the rest in dividends.

Incorporation brings a number of responsibilities as well as potential benefits. By becoming a limited company, the owner limits their personal liability for the business’s debts to their initial investment in the company. However, there are a number of factors you need to remember to keep your business and personal liability separate.

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1. Follow your duties as a director

If you incorporate and become a company director, there are a number of director’s duties, as set out in Section 172 of the Companies Act 2006, you need to abide by. Along with the legal obligations to manage the company in a certain way, there are also a number of accounting requirements you need to meet. There are also certain responsibilities you have to your creditors if the business starts to struggle financially and becomes insolvent. Failure to meet these obligations could result in you being made personally liable for a proportion of the company’s debts.

2. Respect the ‘corporate veil’

The ‘corporate veil’ is the term used to describe the shield that separates the owner of a limited company from the liability of the company itself. However, legally speaking this veil can be ‘pierced’ if you fail to act properly as a director. For example, a director who runs a limited company with no real distinction between the business’s and their personal assets can be made personally liable. This can also be the case where directors use the limited company structure simply as a way to facilitate fraud. The corporate veil can also be pierced when a company becomes insolvent and the director continues to trade wrongfully.

3. Meet your new tax obligations

Incorporating a one-man consultancy business creates a new set of tax obligations. You will need to pay corporation tax and file your corporation tax return by your deadline – usually 12 months after the end of your accounting period. You will also have to register for VAT if your company turnover reaches the VAT threshold (currently £82,000) for any 12 month period. You will also need to set up payroll accounting for yourself (if you are drawing a salary) and any employees, as National Insurance contributions will have to be made on any salary and bonuses over £8,060.

If you fail to meet your new tax obligations, in certain cases HM Revenue & Customs can pursue directors personally via personal liability notice (PLN), leaving you liable for debts such as unpaid National Insurance contributions.

4. Invest in the proper insurance

The protection that comes with limited liability should be seen as the last line of defence rather than a failsafe method of protecting your assets. If your objective is to grow and build value in your business, then an investment in the proper insurances should be carefully considered. Owner-managed consultancy businesses will not necessarily have the budget to protect against every possible risk, but there some insurances, such as professional indemnity policies, which provide a valuable extra layer of protection.

5. Consider a Limited Liability Partnership (LLP)

A limited company is not the only commercial structure that enjoys the benefits of incorporation. A Limited Liability Partnership (LLP) offers limited liability in the same way as a company, but with the organisation structure of a partnership, with members rather than shareholders and directors. An LLP does not pay corporation tax; instead, it is taxed as an ordinary partnership, with each member paying income tax on the profit from their shares.

How can we help?

If you’re struggling with any aspect of limited company debt, or have fallen behind on your payments to HMRC and are worried about being made personally liable or receiving a late payment penalty, we can help. Get in touch today to take advantage of our free debt advisory service. Please call us on 0800 074 6757, email: info@companydebt.com, or use the live support feature on our website.