Is operating as an unincorporated business really a ‘cheap’ option?

When many entrepreneurs start out in business the default position is to operate as a sole trader or a partnership. This is more straightforward than operating as a limited company and is considered a cheaper alternative as it avoids the costs of incorporation and the higher accountancy costs associated with running a limited company. However, it is becoming increasingly evident that the ‘cheaper option’ of running an unincorporated business can be something of a false economy and could be an option that the unwary business owner simply cannot afford to take.

Over recent years, HM Revenue & Customs have been shifting the burden of much of the work that they historically did onto the shoulders of business owners and their accountants. In particular, the extra compliance work associated with the Construction Industry Scheme (CIS), being VAT registered and the newly introduced Real Time Information impacts upon both incorporated and unincorporated businesses alike, and from a workload perspective does not therefore provide a compelling argument in favour of incorporation. However, when considering the associated punitive penalty regimes there is a strong argument in favour of operating as a limited company that could be too costly for many business owners to ignore.

The harsh penalties associated with non-compliance can soon mount up, even for small businesses, and leave business owners faced with fines amounting to tens of thousands of pounds. Whilst this is always an undesirable position, those business owners who operate under the protection of a limited company at least have the option of liquidating the company and walking away without facing a personal liability. The outlook for unincorporated businesses however could be considerably bleaker, with the business owner facing the prospect of re-mortgaging or possibly even bankruptcy.

Incorporated business are unquestionably more difficult and costly to run but business owners need to seriously consider whether they can run the risk of operating without the safety net of limited liability. The days of operating an unincorporated business as a ‘cheap’ option look to be numbered.If you are uncertain about whether you would benefit from being incorporated then please do not hesitate to contact us at DEB Chartered Accountants.