Best Business Blog

To incorporate or not?

This is the one question that constantly arises from traders, about whether or not they should operate their business as a soletradership, or as a limited company.

Like all decisions in life there are plusses and minuses, and NO right answer.

There are a myriad of issues in respect of commercial reality, tax mitigation, perception to customers and suppliers, and the feel good factor.

Some individuals wish to trade under the guise of a limited company to give an indication they are bigger than actual, others do it to protect themselves against a customer going “belly up”, some do it to control the amount of personal tax they pay, and others do it to offload income to their spouse (ie the spouse is merely a tax write off).
Always remember that if money is owed to the bank, the bank requires personal guarantees, so personal liability is still in place,  the only difference is the tax man and other suppliers can be told to “go and hoke” (subject to certain items such as employers national insurance etc)

The general rule is that you incorporate your business under the following circumstances:

1.    If you can be in a position to control your extractions from the company. E.g. pay yourself a smallish salary, and take the rest out as dividends, and pay no tax thereon (unless you reach high rate tax, even so you avoid Employers NIC)
2.    Actually have a supplier base, and customer base, that the company is seen as trading, and not just an individual offering his time as services (lok up IR35 on your favourite search engine)
3.    If you have a wish (under current legislation) to develop your business and then sell it in a few years. (to avail of 10% tax rate on disposal)
4.    If your net profit is over 50k per annum, and you are happy to live on less money, and pay tax at 20% instead of 40%
5.    If you may have a concentration of income on a customer  who may go belly up, and leave you with an inability to meet your debts
6.    If you wish to do something hookey, and if  caught, you can walk away from Revenue and Customs (false invoicing and fraud aside)

There is no correct answer, and bottom line is that if you speak to your accountant in the same way as you would speak to your doctor (ie openly and honestly), he/she can advise you on whether or not to incorporate.

A recent practical example were two people in the same industry (electrical installation), where one clients customer base was domestic, the other was commercial.

Both businesses were making the same level of profits, but :

1.    One business owner had his mortgage paid off, the other was working to pay his mortgage.
2.    One business owner  was mid twenties, the other was early fifties.
3.    One business had top 25 customers of £20k per annum each, the other had turnover customers of £400 each
4.    One was married, the other was divorced
5.    One had children, the other had suspicions
6.    One business owned their premises the other had a 10 year lease without break clauses
7.    One had an attitude like Del Boy, the other was a saint

The above are merely 7 differences in two identical businesses, so for the mathematically oriented there are 2 to the power of 7 permutations, ie 128 different answers whether or not to incorporate.

In this example I have restricted the options to seven to make a point.  In  real life, the number of possible differences is exponentially greater,  and hence it is important for the accountant to “know thy client”, both in current terms, and in aspirations.

There is one downside.  Tax laws are constantly changing.  4 years ago,. It was possible for a person to earn 30k per annum, and personally pay NO tax, and NO national insurance personally, but for their company to pay around 3 ½ k to Her Majesty Revenue.  Ie a tax rate of under 12%, but the chancellor realised he was a silly boy, and changed the rules. Its just a pity the government have no sense of humour.  They’d be a lot more popular.

John Carlton, copywriter explaining how to use headlines.

For more information head to his blog www.John-Carlton.com.

1.    What’s the saying? Keep your friends close and your enemies’ even closer still? How about becoming one of their customers and that way you can steal their best ideas.

2.    Snooping – Your rivals love to brag about deals done, new ideas that have worked, they put press releases out.  All this can be found on their website, on forums and through press releases put on line.  Try doing a search on their name and see which business forums they belong to and then you can go and see what exactly they are saying.  Set up Google and Yahoo alerts with their company name and you will be forewarned when anything appears on the internet about them.

3.    Poach their staff.

4.    To stop them poaching your staff though, reward your troops, give them perks and incentives, make them feel part of the set up, that will then stop them moving to your competition.

5.    Reward your customers too, after all they are the fickle ones that will move at the offer of free goods or points towards goods, reward systems do work and do maintain customer loyalty.

6.    Be a copycat.  Take their best selling goods and sell them cheaper.

7.    This is a dirty one that does often happen – sabotage them.  Booking appointments and not turning up, having them running all over the place tracing new customers who don’t exist, and of course your answer is to think about how they can do this to you, and putting systems in place to make sure it won’t work in your Company.

8.    Undercut them.  John Lewis plc has a reputation built on ‘never knowingly being undersold’.

9.    Form an alliance with a company whose product enhances your own.  Bounce off each other sales wise and cross promote each others products.

10.    Flaunt your ethics, being holier than thou irritates your rivals and woos customers.

11.    The good old, get ‘em drunk scenario whilst you are sober.  Loose mouths talk and brag.

12.    And if you can’t beat them – sometimes it’s good to talk!!

Yep good old twitter!!

Anyone else enjoying it at present?

I have been on twitter now for nearly two years and have seen the rather dramatic uptake recently with celebrities such as Stephen Fry and others joining in and talking about it.

So what is it?

Mini blogging, or another form of networking via that old thing called the Internet. You join up, get yourself a username then head off in to the big yonder and find like minded people to chat to. You are given 140 characters, so watch out for text speak taking over sometimes so you can get your meaning across, and you then start telling the world what is hopefully, useful information or just silly information perhaps.

Don’t fall in to the the trap though of just ‘twittering’ about your breakfast and how many cups of coffee you had etc, make them either silly, funny or informative, and also don’t constantly link to your business or site. You will soon have people stop following you as its perceived as spam.

Its like any community, treat it with respect and enjoy it and you will soon find yourself with some new friends on it.

If anyone wants to see what its all about or even just come chatting to me on it, head over to twitter.com and search for gilliemillie.

You don’t have to reduce sales to reduce your credit risk. Credit risk is the likelihood of you either not being paid at all or not being paid on time.

True you could ask for payment up front and perhaps in some cases that is the answer but if your competitors are not asking for payment up front then chances are that you may loose your sale.

There are a few things that you can do to help get the balance right

Credit Account Application Process

Get a process in place where you capture all the relevant and correct company information and this may need directors and sole traders personal details such as home address and date of birth as you may need to do credit searches as individuals, or check details of other directorships. It is much better to do this up front rather than later on down the line as this will help you decide on a credit limit and you have the opportunity to credit check the company and the individual and ask for further information should you need it.

Application forms signed as authorised person

To prevent disputes later on, it is a good idea to state on the application form that the person signing the application has the power to bind the company.

Check directors details

There are a number of credit information providers who will provide information on directors of companies including other directorships.

Free credit checks & information

Business link are currently offering free credit checks to help businesses assess and manage their credit risk at the moment. You can request this over the phone and they will email a form to you to sign and return and the information is sent to you by email.

Other free resources include companies house and 192.com

Trade References

Seen as a bit of an old fashioned method but quite a good tool to consider using at the moment as business information is changing so frequently. Be aware of “cultivated references” ie; suppliers that are particularly important to your applicant.

Directors Guarantee and Indemnity

If you do not feel comfortable about granting credit to a limited company based for example on length of time trading or recent information on credit searches you may wish to consider asking for a Directors Guarantee and Indemnity. You will need to feel comfortable that the Director will and can pay personally so consider the credit risk as you would for an Individual.

Credit Limits

These are not an entitlement. It is your money and it is how much of a risk you are prepared to take. When setting a credit limit consider what impact this would have on your business personally if the debt is not paid on time or at all. The greater the risk to your business the lower the credit limit regardless of what a “suggested credit limit” on credit agency information. Set a limit that is right for you so that it is meaningful.

Shadow Credit Limits

Keep an eye on customers who are within 80% or so of their credit limit so you can react before the limit is reached or exceeded as otherwise this puts you in a difficult situation of having to consider stopping supplies or allowing the customer to trade with you over their limit in order to keep them as a customer. It is much better to request a payment-on-account or consider an increase in credit limit at this stage than later on.

Billing frequency

Decide how frequently you will bill your customers according to what you require in terms of cashflow. It might be easier to bill most customers at the end of the month however if cashflow is a key consideration for your business then daily or weekly invoicing will help to improve cashflow. You can also set your billing frequency according to credit limits and bill more frequently for higher risk customers than for others.

Payment methods

Are you accepting customer friendly payment methods? Some business banks do not accept cash over the cash over the counter for example. Can your customer pay you via online banking or debit and credit card? Payment methods should not be a barrier to your customer paying you on time.

Dispute management

This can be used as a favourite delay tactic so put processes in place to prevent and handle them quickly and professionally. The treatment for resolving disputes should preferably be stipulated in your terms and conditions and the more you can cover in terms of how disputes will be resolved up front the easier it will be to deal with delayed payments as a result of disputes later on. An example might be to ask for immediate payment of all non-disputed balances while the dispute is investigated and resolved rather than all of an outstanding balance remaining unpaid for the duration of the dispute.

Retention of title

Consult with your solicitor to see if you can have a retention of title clause in your terms and conditions and other information that will need to go with the clause.

Staged payments

You can agree these up front for larger projects so that your credit risk is managed in line with the staged payments agreed. This is particularly useful for tradespeople and in the IT industry but the concept can be used in other industries too.

Backup finance

Consider the options of finance by way of a back-up plan in case a key customer does not pay to avoid the implications of not being able to pay key suppliers or staff wages.

Cashflow forecasting

Whichever format or process you use review this frequently to forecast for debtors that may not be likely to pay on time and consider sales performance in line with this to predict and gaps or trouble-spots in cashflow. Your accountant or book keeper will usually be able to suggest a method that works best for you and your business.

For more information contact Maxine Welford at

www.maxxy.co.uk