If you run your agency as a partnership with one or more partners, and those partners don't share profits equally, incorporating the business is more complicated than it first appears.
Most accountants will tell you that incorporation is a straightforward process. Transfer the trade, assets, and goodwill from the partnership to a new limited company. Issue shares to the former partners. Carry on trading. Simple.
But when profit shares are unequal, say 70/30, 60/40, or even 90/10, the share structure you choose has real tax consequences. Get it wrong, and one partner could face an unexpected capital gains tax bill. Or worse, a charge to income tax on something that should have been capital.
This post walks through the mechanics of incorporating a partnership with unequal profit shares, the tax traps to watch for, and the practical structures that work.
The Standard Incorporation Route (When Profit Shares Are Equal)
Let's start with the simple case so you can see where the complexity comes in.
Two partners, each entitled to 50% of the partnership profits. They decide to incorporate. The partnership transfers its trade, assets, and goodwill to a new limited company. In return, the company issues shares to the partners, 50% each.
Under UK tax law, this transfer is treated as a disposal of the partnership assets by the partners. But because the consideration is shares, not cash, the gain is automatically deferred under Incorporation Relief (TCGA 1992, s162). No tax is payable at the point of incorporation. The partners simply inherit a lower base cost in their new shares, and the gain is deferred until they sell those shares later.
That works perfectly when the share split matches the profit share. The tax deferral applies to each partner's share of the gain, and the shares they receive match their economic interest in the business.
Now introduce unequal profit shares.
The Problem: Mismatch Between Profit Share and Shareholding
Imagine a three-partner agency. Profit shares are 60%, 25%, and 15%. The partners want to incorporate. They transfer the partnership business to a new company. The company issues shares in those same proportions, 60%, 25%, 15%.
So far, so good. The share split matches the profit share. Incorporation Relief should apply in full.
But what if the partners want a different share structure in the company? Perhaps the senior partner wants to retain control with 75% of the voting shares, while the other two split the remaining 25%. Or perhaps one partner is taking a step back and wants a smaller economic stake going forward.
When the shares issued don't match the profit shares in the partnership, you have a problem. HMRC treats the difference as a disposal of part of the partnership assets for consideration other than shares. That part is not eligible for Incorporation Relief. It is a chargeable disposal. Capital gains tax is due immediately.
Worse still, in some circumstances HMRC can argue that the excess value transferred from one partner to another is not a capital gain at all, but earnings, taxable as income at up to 45%.
A Worked Example
Two partners, Alex and Jordan. Alex takes 70% of partnership profits, Jordan 30%. The partnership has goodwill valued at £500,000. They incorporate and issue shares 50/50.
On paper, Alex has transferred 20% of his share of the goodwill (worth £100,000) to Jordan. HMRC sees this as a disposal by Alex of part of his partnership interest. The consideration is not shares, it's the transfer of value to Jordan. That £100,000 is immediately chargeable to capital gains tax.
If Alex has used his annual exemption (£3,000 for 2025/26) and his full BADR lifetime limit is intact, the tax at 18% would be £10,000. If he has already used his BADR allowance, the rate jumps to 20%, a £20,000 tax bill on day one of the new company.
And that's the best case. If HMRC successfully argues the transfer is earnings, Alex could face income tax at 40% or 45% plus Class 4 National Insurance.
When to Incorporate an Agency With Unequal Profit Shares
The question "when to incorporate agency" is usually about timing, is this the right year, given profits, tax rates, and future plans. But when profit shares are unequal, the question of how to incorporate is just as important as when.
If you are in this situation, the answer is not to avoid incorporation. It is to structure the transition correctly from the start.
Three Structures That Work
1. Match the Shares to the Profit Shares (Then Restructure Later)
This is the simplest approach. Issue shares in the new company in exactly the same proportions as the partnership profit shares. Incorporation Relief applies in full. No immediate tax charge.
Once the company is up and running, you can restructure the shareholdings. This might involve one partner transferring shares to another, or the company buying back shares, or a new class of shares being created.
The tax treatment of that later restructuring depends on the specifics. A share transfer between individuals is a straightforward disposal for CGT purposes, often at 18% with BADR if the conditions are met. A company share buyback is more complex but can be structured tax-efficiently.
The key point: you separate the incorporation from the rebalancing. Each step is clean, documented, and tax transparent.
2. Use Different Classes of Shares
You can issue different classes of shares to different partners. For example, the senior partner takes all the voting shares (control), while profit shares are determined by dividend rights attached to separate classes.
This allows the economic split to differ from the voting split without triggering a disposal at incorporation. The shares issued still match the partners' overall economic interests, it's just that those interests are split across multiple classes.
This structure requires careful drafting of the company's articles of association and a shareholders' agreement. It is not a DIY job. But for agencies where partners want different levels of control and income, it is often the cleanest solution.
3. Phased Incorporation
Rather than incorporating the entire business at once, you can transfer parts of the trade over time. This is unusual but can work where one partner is retiring or reducing their involvement gradually.
The partnership continues to trade, but certain assets or contracts are transferred to the company in stages. Each transfer is a separate disposal, and the partners can manage their capital gains positions year by year.
This approach is administratively heavy and rarely used outside of specific retirement planning scenarios. But for agencies with a clear exit timeline, it is worth discussing with your accountant.
The Goodwill Question
Partnership goodwill is often the largest asset transferred on incorporation. And it is the most contentious with HMRC.
When a partnership incorporates, the partners must agree a value for the goodwill being transferred. That value becomes the base cost of the goodwill in the company and determines the gain deferred under Incorporation Relief.
If the goodwill value is artificially high, HMRC can challenge it. If it is low, the partners lose out on the tax deferral. Getting a professional valuation, ideally from a firm with experience in agency valuations, is essential.
Where profit shares are unequal, the allocation of goodwill between partners must also be documented. The partnership agreement should state clearly how goodwill is owned. If it doesn't, the default position is that partners own goodwill in proportion to their profit shares.
We have seen cases where partners assumed goodwill was owned equally (because they were 50/50 on paper) when the profit share had been 70/30 for years. That mismatch created a tax problem that took months to untangle.
Directors' Loan Accounts and Partnership Capital
Partners often have capital accounts in the partnership, money they have introduced or retained profits they have not drawn. On incorporation, these balances need to be transferred to the company.
The simplest method is to convert partnership capital into directors' loan accounts in the new company. Each partner's loan account reflects the capital they had in the partnership. Those loan accounts can be drawn down tax-free over time, or left in the company as working capital.
If the partners want to equalise their capital positions at incorporation, perhaps because one partner has significantly more capital than another, this is a separate transaction from the incorporation itself. It can be structured as a loan between the partners, or as a distribution from the partnership before incorporation.
Either way, it needs to be documented separately from the share issue. HMRC will look closely at any transactions that shift value between partners around the time of incorporation.
Practical Steps Before You Incorporate
If you are a partnership agency considering incorporation, here is what to do before you instruct a solicitor or file any forms at Companies House.
- Get a goodwill valuation. Commission a professional valuation from a firm that understands agencies. The cost is usually £2,000-£5,000. It pays for itself in avoided HMRC enquiries.
- Review your partnership agreement. Does it specify how goodwill and other assets are owned? If not, agree the position in writing before incorporation.
- Agree the share structure. Decide whether shares will match profit shares (and be restructured later) or use multiple classes. Document the rationale.
- Prepare capital account statements. Each partner needs a clear statement of their capital balance. These will become the opening directors' loan account balances.
- Check BADR eligibility. Each partner needs to have held their partnership interest for at least two years before incorporation to qualify for BADR on any future share disposal. If a partner joined recently, consider delaying incorporation.
- Run the numbers. Model the tax position for each partner under different share structures. The cost of getting this wrong is not just tax, it is the damage to partner relationships when one person faces a bill the other doesn't.
When to Speak to an Accountant
If your profit shares are equal, incorporation is straightforward. If they are unequal, it is not. The difference between a clean incorporation and a messy one is often a single conversation with an accountant who has done this before.
At Agency Founder Finance, we work exclusively with agency founders. We have handled partnership incorporations with every kind of profit share structure. We know where HMRC pushes back and how to structure the transition so that no partner gets an unexpected tax bill.
If your agency is considering incorporation and your profit shares are not equal, get in touch before you file any paperwork. A 30-minute call can save you thousands in tax and months of correspondence with HMRC.
For more on agency incorporation and structure, see our guide to incorporation and structure or read about salary and dividends for the post-incorporation phase.
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