Can a small business be a corporation?

The short answer is yes. Any business can become a corporation. But, should you make the change?

To help you make the best decision for your business, we’ll be looking at what a corporation is, how to become a corporation, the benefits of doing so, and what it means when it comes to tax.

Specifically, we’ll be answering these questions:

• What is a corporation?
• How do I turn my small business into a corporation? 
• What are the benefits of being a corporation?
• What are the drawbacks of becoming a corporation?

A corporation is another term for a limited company, a business structure where the company is a legally separate entity from its owner. This means the owners personal finances and assets are safe if the company goes bust. There are 2 kinds of limited companies, private and public.

The most common set up for small businesses in the UK, private limited companies can’t publicly sell or trade shares in their company.

More often larger businesses, public limited companies can raise money by selling shares to the public on the stock exchange. 

On top of those 2 kinds there are 2 different ways to set up your limited company. It might be limited by shares or limited by guarantee.

Limited by shares companies try to make a profit for the owners, meaning they need to pay corporation tax. 

A limited by shares company:

• Is legally separate from the people who run it.
• Has separate finances from your personal ones.
• Has shares and shareholders.
• Can keep any profits it makes after paying tax.

Limited guarantee companies are normally ‘non-profit’, meaning they don’t have to pay corporation tax, like charity organisations. 

A limited guarantee company:

• Is legally separate from the people who run it.
• Has separate finances from your personal ones.
• Has guarantors and a ‘guaranteed amount’.
• Invests profits it makes back into the company.

This is called ‘incorporation’, and involves registering with Companies house. 

To register, you’ll need to provide:

• The company’s registered name and address.
• Names and addresses of directors and, if applicable, the company secretary.
• Details of shareholders and capital (your company’s wealth).

You can register online or through the post, and you can do it yourself or hire an accountant or solicitor to do it for you. 

As we mentioned up top, limited companies are their own legal entity. This is called limited liability, meaning the company’s finances and assets are separate from the owners. So, if the company goes bust and has debts to pay, the owner’s personal assets are safe from banks and lenders. 

Instead of paying income tax, which increases as you bring in more money:

• Personal allowance – 0% on anything up to £12,570
• Basic rate – 20% on anything between £12,570 and £50,270
• Higher rate – 40% on anything between £50,270 and £150,000
• Additional rate – 45% on anything over £150,000

limited companies only have to pay corporation tax, a flat rate of 19% on any taxable profits made by the company. Corporation tax is applied after business expenses are deducted.

This means, after a certain point, it could be more profitable to become a limited company than pay increasing rates of income tax.

On top of the profits your company makes, you’re also entitled to an employee salary. This means you can pay yourself with a mixture of:

• Income – you can pay yourself up to £12,570 without paying any income tax, and you can declare this as a business expense, reducing your total taxable profits.
• Dividends – a bonus for shareholders after a company has made profits. You can earn up to £2,000 in dividends before having to pay any tax, but they can’t be deducted from your taxable profits. Dividend payments will count toward your total taxable income, but they’ll be taxed separately. 

The flexibility of paying yourself with a combination of profits, income, and dividends, means you can pay yourself the best possible wage while incurring the least amount of tax. 

A limited company generally carries a more professional status in the eyes of the public. Even banks are more likely to approve loans for limited companies because they’re seen as more secure business models. 

On top of that, because you have to register the name of your limited company, you can be sure you’re the only one with that name. This adds an extra level of legitimacy and professionalism. 

Limited companies have more records they need to prepare for the end of each financial year, compared to unincorporated businesses, meaning they have more information to keep track of.

Because it’s more complicated, and time-consuming, a lot of business owners hire professional accountants and use accounting apps to help make the whole process a lot easier, 

We’ll talk more about the specific records you need to keep later on. 

Every limited company’s information is available to the public, even private limited companies. This includes information about company directors and earnings. 

There are no specific drawbacks to this, but it’s something worth knowing in case you don’t want that information to be publicly available. 

Limited companies have to keep detailed records about the company, including:

• Directors, shareholders and company managers.
• Results of any shareholder votes and decisions.
• Promises to repay loans at a specific future date and to whom they must be paid back.
• Promises your company makes for payments if something goes wrong and it’s the company’s fault (indemnities).
• Transactions when someone buys shares in the company.
• Loans or mortgages you take out against the company’s assets (valuable items you own).

You also need to keep financial and accounting records, including:

• All money your company receives and spends.
• Details of assets your company owns.
• Debts the business owes or is owed.
• All goods bought and sold.
• Who you bought and sold your goods or services to and from (unless you run a retail business).

Finally, you need to keep any other records of financial information, including:

• All money your company spent, including receipts, petty cash logs, orders and delivery notes.
• All money the company received, such as invoices, contracts, sales logs and till rolls.
• Any other relevant documents like bank statements and correspondence (communication with customers, shareholders, suppliers etc., via letters or emails).

It’s a lot to keep track of, and HMRC can fine you £3,000 for not keeping the right records. So again, it’s definitely worth hiring an accountant, and using accounting software, to keep you right. 

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. 

You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.

Find out more here.