Limited Company Benefits

T.C.

I don't work with limited companies. I keep to sole traders and partnerships, so I need a little advice. I have clients, who run a partnership and want to know the advantages, or not, of becoming limited. They are a family business with 3 partners (mother, father and son) and they turnover about £250K. Any help would be appreciated. (Obviously one disadvantage for them is me, because I wouldn't carry out doing their accounts!!)

Monsoon

The main advantages are:
Limited liability
Tax savings.

Depending on what the business does, they may be able to transfer goodwill to the Ltd Co. If it's free goodwill (eg Joe Bloggs Clothes Shop, the shop is the reputation and if they sold it to a stranger, the customers would still stay, providing the business remained the same) then there can be good tax advantages. If it's not free goodwill (Joe Bloggs Architect, sole trader, if he sold the business, the owner wouldn't necessarily retain the customer base as they were using Joe Bloggs, and might not want to use James Biggs) then no advantage but still may be beneficial tax wise on an income (actually CT vs NI) tax level.

Basic tax savings: You save the Class 4 NI. Broadly speaking, directors take salary of £5720 to cover personal allowance and get NI stamp, and take the rest in dividends. No tax is payable by the individual while they remain a basic rate taxpayer. 25% tax on dividends received at higher rate.
The only tax paid is CT by the company, currently at 21%. Divis can only be paid after post CT profits.

Run a comparitive taxcomp to see at what point the company becomes more beneficial.

Goodwill: Joe Bloggs Clothes Shop; free goodwill is valued at £100k. In the company, DR Goodwill, CR directors loan account. The directors can receive repayment this debt of £100k tax free. However, they will now, since the CGT rule change, have to pay CGT of 10% (entrepreneurs relief, otherwise 18%) on the sale of goodwill above the annual exempt amount. Good will in this case needs formally valuing.

I think that's most of it. Hope it helps. Feel free to ask for more if needed

Gosh, what a lot of tax for a Sunday! I'm going to walk the dogs :thumbup1:

AdamR

Keep in mind the Benefit implications - there will be Class 1A NI on things like company cars, overdrawn current accounts etc.

As Faerie says, do a comparitive tax computation - the turnover you detail doesn't necessarily mean it will be better to incorporate; it's the bottom line that counts. 3 partners could earn in excess of £40385 each (so £122505 total) net profit and be better off under self assessment. (08/09 figures and tax rates).

PaulPSB

Don't forget LLP's - benefit of limited liability status but retain the same status for Income Tax. :001_smile:

T.C.

Thanks for all your answers. I will be back if I need further advice. :001_rolleyes:

claudialowe

Don't forget about the aggro and costs of being Ltd as well - can the partners run a Ltd Co properly, and not just as a partnership taking money out of the company whenever they want to?

Most people can't get their heads round the fact that they are an employee in exactly the same way as if they worked for B&Q or Tesco - and therefore taking £s out of the petty cash tin doesn't work!

Claudia

Jon_1984

Also bear in mind that limited liability is no longer as much of an advantage as many would have you believe.

Many companies will now insist on personal guarantees from the directors of Ltd companies that means they are personably liable in the event the company goes under. Use of these has grown recently.

The other situation we have come across is that courts can assign liability to directors beyond the limited liability, if there is reasonable proof they placed/allowed orders/used services from suppliers knowing the company would be going under.

These are both things I has seen from the industry side of the fence.

Poodle

Hi TC

In my opinion you should not be looking at turnover as a single indicator in the decision to incorporate or not you should also look at taxable profits past and projected along with the future intentions of the owners of the business i.e disposal, retirement.

Also be careful of proposed changes with income shifting legislation although postponed this is still on the agenda and would impact on a close company as well as a partnership. If the family do not incormporate then you should ensure that this is considered anyway.

Poodle

T.C.

Thanks for all your input. "I'll be back".

JodieR

T.C. wrote: »

so I need a little advice.

Nope, THEY need a little advice :P. As you've already told your client that you don't deal with Ltd Companies, my advice to you would be to suggest one or two local accountants who your client should arrange a meeting with to discuss their affairs with. Yes, they'll probably charge for it but if they're serious about incorporating then (as you've probably already pointed out to them), it's going to cost them more in accounting fees and getting good quality advice from the start has got to be the best thing for them. Not that I disagree with anything that anyone else has said, but there are obviously a lot of factors that need to be considered and if I was in your shoes I would say something to the client along the lines of 'It MAY be beneficial to incorporate the partnership but as there are a lot of factors to consider I think it would be best if you spoke to XYZ Accountants who will be able to point out all the pros and cons for you' . If you really want to be helpful (as it sounds like you do!) you could offer to attend the meeting with the client - this may also give you the opportunity to suggest to the accountant that you could still do some bookkeeping for the client and leave the accounts prep to them?