Accounting in Focus-Incorporated vs Unincorporated Entities: Part 1 of 2

Bodies Corporate, or incorporated entities, refer to businesses which are identified as organisations with a legal identity separate from their shareholders, whose liability is limited. These companies are recognised by law as legal entities in their own right. As a result, creditors and lenders who seek to commence legal proceedings must do so against the company itself, this is termed in accounting as being unable to lift the ‘veil of incorporation’.

If your business is set up as limited company, your accounting requirements are likely to be radically different from that of unincorporated bodies such as sole traders and partnerships. Differences can stem from presentation of financial statements which is dictated by law for companies in the form of Companies Act 2006 and International Financial Reporting Standards, whereas unincorporated entities prepare their accounts in accordance with UK GAAP. More complex, differences may arise when dealing with the bookkeeping and raising of capital as well as tax consequences.

Limited companies have more stringent regulations in relation to maintaining a detailed record of their transactions which can conjure up unnecessary storage bills in relation to paperwork, needlessly denting profitability. With our cloud based accounting and bookkeeping software, we can eliminate any storage costs being incurred by your entity thereby decluttering the workplace as an added bonus!

Shareholders can derive a host of benefits from setting up as a limited company… but certain risks persist nonetheless.

Unlike sole traders, limited companies get taxed at the corporation tax rate which, at the time of writing, stands at 19%. This presents numerous benefits to individuals seeking to becoming incorporated since the income tax rate to those who are employed or set up as a sole trader is 20% on income above £12500, soaring up to an eye-watering 40% on income above £50,000. We can devise effective tax optimisation strategies to enable the company to retain as much of its profits as possible to plough back into the business whilst also ensuring your financial well-being. By weighing up the alternative payment options in terms of salaries and dividends, we can minimise your personal tax bill too.

Lastly, limited companies are better positioned  to raise funds for expansion or other purposes through sale of shares either to the general public, if a public limited company, or to friends and family if it’s a private limited company. The relative ease of raising capital whilst having personal protection from the risk of liquidation makes limited companies an alluring option for many. Sole traders and partners, by contrast, must invest their limited savings whilst also struggling to raise finance externally which limits their potential to expand operations and establish dominance in national or international markets.

Make the right decision to avoid unintended consequences of the wrong company structure later down the line.

However, a public limited company may incur additional issue costs when issuing shares such as accountancy and legal fees or payment of fees to merchant banks if the issue has been underwritten. Additionally, care must be taken when deciding the class and number of shares to be allotted to shareholders in successive issues or at the initial public offering. Without astute judgement, this can have crucial implications at the annual general meeting in terms of voting rights and the influence of shareholders on the vision and direction of the company. Our expertise in limited companies enables us to appropriately draft the Articles and Memorandum of Association to be in line the requirements of the owners and avoid potentially fatal financial consequences in the future.

Check out our next blog to unravel how the accounting would differ for an unincorporated entity as well as the benefits and drawbacks of setting up as a sole trader or partnership. Planning on setting up a business? Not sure how to proceed with the glut of formalities? Seeking a trusted partner to support your organisation from the get go to fuel your success and ensure recovery from the lows? At Cheylesmore Accountants, we aim to provide a flawless service of the highest standards to all our clients, regardless of their status as an incorporated or unincorporated entity. From incorporating a company or commencing an unincorporated business, we will always be your side at every step of the journey. So what are you waiting for? Book an appointment via our website to get in touch with our accountants to find out the numerous ways in which we can assist you.