Why a Limited Company - help!

23.05.2022
James Rix
News

A Limited Company is:

"A private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested"

More and more we have clients approaching us about this particular topic. With legislation ever changing, MTD being introduced, people looking at options post pandemic peak and generally in short everything becoming a little more complicated, this point keeps popping up. 

"Why a Limited Company?"

The conversation usually starts with; "I do not want to become a limited", or "Why do I need to switch because I haven't been previously", or "I do not understand the difference".

Here we give a short summary about key points and also answer some questions you may have.

Post pandemic we have seen a trend with more people taking a step back and considering their options and priorities. A Limited Company is not to be afraid of. Yes, in the news there have been recent stories on companies and audits, but their circumstances and yours are likely to be completely different. At Lovewell Blake we work with you to ensure you are on the right path and given the most current advice possible. By forming a strong relationship with clients it becomes more personable than adviser/client and allows us to have a greater understanding of the bigger picture in order to be able to give you that next level of advice. 

Key points:

Limited Liability

Limited Liability is essentially limiting the liability of the shareholders. When incorporating, a Limited Company, a veil of incorporation is created. The Limited Company is therefore to be treated as a separate entity. The company encompasses all assets and liabilities with everything in the company's name.

If the company was to be unsuccessful and potentially wound up, the liability a shareholder is expected to cover is restricted to the value of their share capital. In essence, any personal assets a shareholder owns e.g., private residence, car etc. are protected from the creditors of the limited company providing the company has not traded wrongfully. This is one of the main drivers at present as it allows a level of security a shareholder feels more at ease with.

Corporation tax

Companies are taxed at corporation tax rates; these are currently 19% on all profits. This tax rate is lower than that of income tax and national insurance but extracting taxed profits from a company will be subject to income tax at the dividend rates. A company could be a perfect vessel if you already have income from other sources and wish to build a surplus in the company for a later date, therefore not suffering additional income tax on dividends and potentially push you into a higher band of income tax.

Therefore, savings can be made by designating your income, if possible, through a company, especially if you are a higher rate taxpayer.

If a surplus is to be built up and reinvesting likely, as there are no funds being withdrawn from the company there is no additional tax consequence. Whereas, if this was held in a sole trader or LLP business, all profits would be taxable regardless if there was a plan to invest.

Dividends

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (called retained earnings). Dividends are again taxed differently to normal employment income also with current dividends being taxed at 8.75% at the basic rate of tax. Dividends can be used to control your income in each tax year, resulting in better tax planning. Dividends cannot be back dated so it is crucial time is spent planning the remuneration for the period to ensure your end goal is met whilst being as tax efficient as possible.

Planning - share classes/rights

Share rights - rights come in two main ways. Voting and dividends.

If there was a shareholders meeting and a vote held, each person who holds a voting share is entitled to vote. Their vote would equal their percentage of voting shares. For example, if there were 100 voting shares in issue in a company and A owns 38 shares, therefore, A's vote would reflect as 38/100 of the overall vote. The important thing to remember is percentage not number. If someone has only 2 shares (out of 100 in issue), then their vote represents a far smaller percentage of the overall shareholding.

Dividends - as mentioned above dividends are withdrawals from the company. Dividend rights provide that the holder of the shares would be entitled to the dividend per share agreed.

Many family companies are structured so junior members of the family have a percentage of ownership and hence an entitlement to dividends. Be careful around children holding shares though.

If you would like to discuss your trading entity in further detail

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