Engineers study mechanics of becoming a limited company

HP writes: We are a small firm of engineers doing contracts in Britain and overseas. We have read about situations that called for a change from sole-trader/partnership to limited company. We are thinking about doing this. What do you advise?

Answer

The question of whether to incorporate a business is often asked in terms of saving tax, but commercial considerations are just as important, writes Jon Sutcliffe, partner at Kingston Smith. The key feature of using a company is that it is a separate legal entity, giving the shareholders limited-liability protection. The limited-liability aspect may be of value to you. Given the increasing trend towards litigation, and the difficulty these days of getting insurance at a reasonable price, the limited liability may, in time, become essential to your risk management of the business. You should also consider how a change would affect the business. Will it cause problems with clients, suppliers and staff? Your clients are unlikely to change their attitudes. For suppliers, a company may be more creditworthy than a partnership, as its accounts are publicly available. Explaining the changes to everyone who deals with your business should avoid problems. This alteration would affect you as a partner. You would become a shareholder and, usually, a director. When the “partners” change, or when profit-sharing ratios are revised, this will usually involve a transfer of shares between partners. The tax treatment of the firm will be different. Generally, if the partnership’s profits are below £300,000, incorpor- ation will reduce the tax burden on the partners, especially in years when some profits are retained to fund growth. Seek advice before making any decision, as incorporation can be expensive to reverse. You may also want to consider changing to a limited-liability partnership, which combines some of the benefits of a company with those of a partnership.