Change of status...
Quite often the format for running your business will have depended on your personal circumstances at the time of start up, but circumstances change as your business grows and it might be worth reviewing your options.
One of the major benefits from incorporating your business into a Ltd company/LLP is limited liability. This means that providing the rules are followed individuals will not take on personal liability for contracts and creditors. In these uncertain economic times this is not only an advantage for existing businesses but also for any budding Alan Sugar apprentices setting up a new business. Often a Ltd company will operate a number of separate divisions although these are still all part of the same Ltd company. You could also consider having a group structure. This protects an established profitable business from a new or untested business venture as each part of the group enjoys the protection of limited liability. Care must be taken though, where the ‘small profits rate’ for corporation tax has to be divided between associated companies.
Roles in the business can be reviewed at this time especially when incorporating an existing partnership business into a Ltd company. This has tax planning benefits, as a shareholding director of a Ltd company can receive a salary, dividends and loan repayments. A “silent partner” may become a shareholder (“investor”) but not a director (“manager”) and key employees can become directors but not shareholders. Employees can ‘participate’ and have non-voting shares and have a stake in the business without having any control.
LLPs have been overlooked by many businesses despite the fact that they offer limited liability status with partnership style taxation. LLPs have been popular with many professional businesses which traditionally operated as a partnership, often due to the regulatory requirements of their governing body. We have a number of clients who successfully use both an LLP and Ltd for different aspects of their businesses. Of course having several types of business being run alongside one another does require more administration but the benefits can far outweigh the extra costs which may arise. One of the benefits to having both a Ltd company and a partnership is that it allows income sources to adapt quickly and tax efficiently which might be important following some of the potential changes in the first “ConDemNation” budget. We may see reductions to the small profits rate of corporation tax, changes to tax thresholds, NI rates and various other tweaks to the taxation system.
There are however some perceived disadvantages to incorporation but this does not discourage over 300,000 new companies being formed every year. The public register at Companies House holds a Ltd’s/LLP’s accounts, however, as the accounts filing deadline is 9 months after the year end the information in these accounts may be out of date and of limited commercial value. Also, it is common for banks, landlords and finance companies to still require personal guarantees whilst the newly formed Ltd company/LLP establishes a credit history. Where possible any personal guarantee should be limited to an agreed sum. In reality you are still better off providing a limited form of personal guarantee than having the unlimited liability associated with sole trader status. In terms of cost it is not expensive to set up a new Ltd company/LLP as the registration fees are just £20 for the DIY route. It is recommended however, that you have a professionally prepared agreement regulating Ltd companies, LLPs and partnerships which will mean that the overall costs will be roughly the same. This is why most people choose to use a specialist solicitor or company formation agent so that they avoid potentially expensive mistakes and get the correct agreements in place from the start.
If you are a new/start up business and would be interested in some advice on this subject why not come along to our free breakfast seminar at the Derbyshire & Nottinghamshire Chamber of Commerce in Chesterfield on the 11th June at 8am. Book your place by visiting http://www.dncc.co.uk. Non-members welcome.