Financial Matters

THE LIMITED COMPANY AND ITS GREATER TAX PLANNING OPPORTUNITIES

If you are about to start a business, you will need to decide the format that suits you best. It is very important to understand the options, since some formats may be wholly unsuitable for you and your proposed business. A business likely to have smaller profits can be established as a sole trader or if there is more than one person involved then a partnership would make sense. A partnership allows for the profits to be divided in an agreed fashion and the partners involved must each include on their personal tax return their share of the partnership’s profits. The partnership must also submit a tax return, but the partnership per se does not pay tax. A sole trader and a partnership each have a simplicity to them and there is little room for tax planning. The sole trader and the partners in a partnership are taxed personally on the profits made each year, regardless of how much money they have drawn out of the business themselves. The limited company is completely different and is quite separate from the owners and directors. A limited company must have at least one director, and at least one owner. The owners of a limited company are the shareholders, and a limited company can have a vast array of types of share capital and can have many shareholders. The shareholders enjoy limited liability, in that personally they are not responsible to the company’s creditors in the event the company fails. This is a key difference compared to the sole trader or partners in a partnership who are personally responsible for the debts of their business. Often when companies are formed a range of share types is beneficial. The profits of a company, (after the company has calculated the corporation tax it must pay), can be distributed to the shareholders when the directors vote a dividend, and importantly the director(s) can vote a dividend to a particular class of shareholder and overlook the others. This is immensely important for the planning of extracting the profits from the company. Unlike the sole trader or partner, the shareholders are only taxed based upon dividends they have received, and the timing of those dividends is under the control of the directors who are often also the shareholders. It is quite commonplace for a company to be incorporated with different share classes and those shares to be held by members of one family. For example. a spouse does not have to work in the ‘family business’ to receive dividends from the company and if the dividends are shared between family members then the overall personal tax burden is often less. Compared to sole traders and partnerships, the limited company has a lot of planning opportunities both for tax saving strategies as well as control over the timings of when its shareholders’ personal tax liabilities will fall due. To navigate this area does take experience and should be discussed with an accountant ideally before the company is established. Companies that are already established can bring on board new shareholders and start paying dividends to them, but great care must be taken because an established company is very likely to have value and changing the shareholders can create unwelcome tax liabilities.

Peter Bevan Bevan & Co, Chartered Accountants peter@bevan.co.uk

MOSTON ROOFING LTD ARE THE FLAT ROOFING EXPERTS SPECIALISING IN BOTH FIRESTONE RUBBER & G.R.P FIBERGLASS ROOFING.

Both systems have a 20 year guarantee & are suitable for all types of flat roofs.

Call 0161 359 5276 today for a FREE quote. www.mostonroofing.co.uk