Should You Incorporate Your Business? The Tax Implications Explained

Deciding whether to run your business as a sole trader, partnership, LLP, or limited company isn’t just a matter of branding or personal preference. In many cases, tax plays a major role in the decision—and with good reason.

While incorporating (i.e. setting up a limited company) can offer benefits such as limited liability, more flexible profit extraction, and a more professional image, it also brings with it a range of tax consequences, both immediate and long-term.

At Merranti Accounting, we regularly help clients assess whether incorporation is right for them. Here’s what you need to know about the key tax considerations—and how to avoid the common pitfalls.

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What Do We Mean by “Incorporation”?

Incorporation typically means transferring your existing business—whether you’re a sole trader or part of a partnership—into a limited company. This process involves transferring the business assets, operations, and goodwill into a new legal entity (the company), often owned and operated by the same people.

But incorporation can also include the formation of a limited liability partnership (LLP). This structure offers some of the protections of a limited company while still being treated as a transparent partnership for tax purposes.

Let’s look at both paths—and the tax issues involved.

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Incorporating as an LLP – A Tax “Non-Event”

When a traditional partnership converts into an LLP, the new structure is recognised as a separate legal entity, but the tax treatment remains the same:

• Each partner (now called a “member”) is still taxed individually on their share of the profits.
• There’s no disposal for CGT purposes, even though the business now technically belongs to a new legal body.
• There’s no need to value or sell assets, unless you’re also changing ownership or structure.

So from HMRC’s point of view, converting to an LLP is a non-event for tax purposes. This can be a neat solution for partnerships that want limited liability without triggering a major tax event.

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Incorporating into a Limited Company – A Tax “Event”

If you’re incorporating into a limited company, the tax rules are very different.

1. Capital Gains Tax (CGT) – The Big One

When you transfer a business into a limited company, HMRC treats this as a disposal of the assets for CGT purposes—even if you’re still the owner (just now via shares).

That’s because you’re moving ownership from yourself to a separate legal entity.

The good news? There’s a relief available:

➤ Incorporation Relief (TCGA 1992, s.162)

If you transfer all business assets (except cash) into the new company in exchange for shares, you may automatically qualify for incorporation relief. This means:

• No CGT is due at the point of transfer.
• The gains are “rolled over” into the value of the company shares.
• You only pay CGT when you later sell those shares.

✅ Conditions for Incorporation Relief:

• You must be running a business (not just a trade).
• You must transfer all business assets except cash.
• You receive only shares in return (not a mix of cash and shares).

❌ You can choose to disapply this relief if you’d rather pay the CGT now—possibly to benefit from Business Asset Disposal Relief (BADR).

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2. Business Asset Disposal Relief (BADR)

If you don’t claim incorporation relief, and instead choose to pay the CGT at the point of transfer, you may be eligible for BADR, which means:

• You pay only 10% CGT on the gains (instead of 20%).
• Lifetime limit: £1 million in qualifying gains.

Some business owners choose to “get it over with”, lock in the 10% rate, and avoid future tax on the shares.

⚠️ But be careful: You need to meet the BADR criteria, and you won’t qualify after incorporation if the company later sells the assets.

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3. Director’s Loan Account: The “Hidden Benefit”

When you incorporate and transfer your business to a company without incorporation relief, the value you transfer in is treated as the company “buying” the business from you.

This is often credited to your Director’s Loan Account, meaning:

• You can draw money back from the company tax-free, up to the value of the account.
• It’s a useful way to extract funds without salary or dividends.

🧮 Example: You transfer a business worth £100,000. That amount is credited to your director’s loan account. You can withdraw up to £100,000 from the company with no income tax liability.

But this only works if the business is valued correctly—overvalue it, and HMRC may argue that excess withdrawals should be taxed as dividends.

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What About Stamp Duty Land Tax (SDLT)?

If your business owns land or property, incorporation could trigger Stamp Duty Land Tax (SDLT)—and that can be a major upfront cost.

• SDLT is payable on market value, even though no money changes hands.
• Must be paid within 14 days of completion.

💡 Exception: If you’re incorporating a family partnership, and all partners become shareholders, you might avoid SDLT under Schedule 15, Finance Act 2003.

But—there are anti-avoidance rules, especially if:

• You restructure again within 3 years, or
• HMRC suspects the purpose was solely to avoid SDLT (Finance Act 2003, s.75A).

Professional advice is essential here. SDLT mistakes are expensive and time-sensitive.

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Key Considerations Before Incorporating

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Final Thoughts – Is Incorporation Right for You?

Incorporating your business is not just a formality—it’s a complex tax event that needs to be carefully planned.

The right decision depends on:

• Your long-term goals
• Whether you plan to sell the business
• How much profit you want to extract
• Whether property or other high-value assets are involved

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Speak to Merranti Before You Make the Move

At Merranti Accounting, we help business owners:

• Decide if and when incorporation makes sense
• Structure transfers to maximise tax relief
• Prepare valuations and HMRC documentation
• Handle SDLT planning for property-based businesses

Book a consultation today to explore the most tax-efficient way to incorporate your business—while keeping your options open for the future.