For a small business, there are many decisions to make. First of all, you want to start making a profit and seeing some rewards for your hard work. Once that starts to happen, and you notice that your new business is beginning to grow at a steady rate, you need to think about how to lowers costs here and there, whilst also staying within guidelines and ensuring that you get the most out of your business’ performance.

One question which many small businesses agonise over, is whether or not to incorporate.

One of the biggest reasons to incorporate is the protection you will receive from limited liability. We live in an era of ‘no win, no fee’ and that means that more and more customers or clients may be inclined to make a claim on your business if they feel they have been wronged in some way. These claims aren’t always fair on the business itself - what if you haven’t actually done anything wrong, yet you’re staring at a claim which could take a considerable amount of cash from your business? Limited liability is something which can literally limit the risk, and is an ideal benefit for any business which works within what is considered a ‘risky’ area for claims.

The Second Biggest Benefit is Around Your Tax Bill

Did you know that by incorporating your business, you may actually be able to lower your tax bill as a very pleasant side effect?

There are three areas to this - a potential tax deferral, splitting your income, and deciding how and when you receive income from the business itself. All of these areas will affect your end tax bill and when you need to pay it. For some businesses, especially those which may not have had the best year, this can be a major advantage.

Upon incorporating your business you have the power to decide how and when you take cash from the business, which can actually work to lower your tax bill. You can choose to take a salary at a time which will mean you pay less tax, and not when your business has a good chunk of income. You can also decide to take dividends instead, which has the same effect.

Opting to defer your tax is useful if you have a high personal tax rate. Remember, business rates are lower than personal tax rates. If you don’t necessarily need to take money from the business, you can opt to leave it there, and withdraw it when your rate of personal tax is at a lower rate. Again, you save cash.

Splitting Income

The final option is looking at splitting income. You could opt to make your partner or children shareholders in your business, which allows you to redistribute cash from your business to those with lower tax brackets.

Looking at how to lower your tax bill is full of complicated areas and that makes it even more important to enlist the help of a qualified and experienced accountant.

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- Written by: Jag Bath