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What are the Pros and Cons of Limited Companies?
Click here to access the spreadsheet
What is a Limited Company?
A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.
Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.
What is a Sole Trader?
If you start working for yourself, you’re classed as a self-employed sole trader – even if you’ve not yet told HM Revenue and Customs (HMRC).
As a sole trader, you run your own business as an individual. You can keep all your business’s profits after you’ve paid tax on them.
You can employ staff. ‘Sole trader’ means you’re responsible for the business, not that you have to work alone.
You’re personally responsible for any losses your business makes.
The key Advantages and Disadvantages of Companies are shown below.
How do you form a Limited Company?
You can form your company directly with Companies House for £15, it normally takes 24 hours
You’ll need:
- the company’s name and registered address
- names and addresses of directors (and company secretary if you have one)
- details of shareholders and share capital
Personally, I find it easier to use a formation agent such as Company Wizard for £16.99
Often using an agent will mean the company is formed quickly, sometime within a couple of hours.
What are the next steps?
Once your company has been formed you need to:
- Open a bank account for the Company, this can often take a couple of weeks
- Register for Corporation Tax
- Register for other taxes (if they apply to your business) – VAT, PAYE, CIS
- Appoint an accountant (recommended but not compulsory) – Form 64-8
- Set up your accounting software
- Create shareholder agreements, contracts and other legal documents (if required)
steve@bicknells.net
Can you save tax by transferring your self employed losses to a company?
If you are self employed and your business makes losses you have the following options to use the losses:
- You can reduce your current year tax bill
- You can offset it against earlier years (up to 3 years)
- You can carry your loss forward
You can’t claim:
- if you use cash basis
- where you don’t run your business commercially for profit
- for part of a loss (you must claim the loss in full) – so it could wipe out your personal allowance
- if you are part of a limited liability partnership
- where your losses are tax-generated
If you transfer your business in exchange for shares to another company, you can use any unused losses against your income from the new company.
Further details in HS227
What this might mean is that as a sole trader you waste your personal allowance because your profits are offset to zero by losses, however, if you had a company that paid you £10,600 you would keep your personal tax free allowance and be able to use the losses against the remaining profit.
The rules for company losses are noted below.
Trading losses that you’ve not used in any other way will be offset against profits from the same trade in future accounting periods. You don’t have to make any claim for this to happen. It’s done automatically if you fill in your Company Tax Return.
Corporation Tax Act 2010, Section 45
Carry forward of trade loss against subsequent trade profits
(1)This section applies if, in an accounting period, a company carrying on a trade makes a loss in the trade.
(2)Relief for the loss is given to the company under this section.
(3)The relief is given for that part of the loss for which no relief is given under section 37 or 42 (“the unrelieved loss”).
(4)For this purpose—
(a)the unrelieved loss is carried forward to subsequent accounting periods (so long as the company continues to carry on the trade), and
(b)the profits of the trade of any such period are reduced by the unrelieved loss so far as that loss cannot be used under this paragraph to reduce the profits of an earlier period.
(5)In this section and section 46 references to profits of the trade are references to profits of the trade chargeable to corporation tax.
(6)Relief under this section is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts.
steve@bicknells.net
Will your Share Buy Back pass the ‘trade benefit’ test?
Often as part of an exit strategy or succession planning companies will buy back shares.
Setting aside the mechanics, nicely explained in the ACCA Technical Factsheet 177 and the need for S1044 CTA 2010 clearance, the Buy Back has to be in the benefit of the trade not just the shareholder.
For example….
If the purpose is to ensure that an unwilling shareholder who wishes to end his association with the company does not sell his shares to someone who might not be acceptable to the other shareholders, the purchase will normally be regarded as benefiting the company’s trade.
Examples of unwilling shareholders are:
- an outside shareholder who has provided equity finance (whether or not with the expectation of redemption or sale to the company) and who now wishes to withdraw that finance
- a controlling shareholder who is retiring as a director and wishes to make way for new management
- personal representatives of a deceased shareholder, where they wish to realise the value of the shares
- a legatee of a deceased shareholder, where he does not wish to hold shares in the company
Assuming that the shares aren’t being bought back at Par Value, basic rate taxpayers will probably prefer dividends for any surplus where as higher rate taxpayer will want capital treatment.
Share Buy Back is complex, make sure you seek professional advice.
steve@bicknells.net
How do you tell HMRC a company is dormant or active?
Dormant is a term that HMRC and Companies House use for a company or organisation that is not active, trading or carrying on business activity. But HMRC and Companies House use the term dormant in slightly different ways.
For Corporation Tax purposes, HMRC views a dormant company as a company that’s not active, not liable for Corporation Tax or not within the charge to Corporation Tax.
A dormant company can be, for example:
- a new company that’s not yet trading
- an ‘off-the-shelf’ or ‘shell’ company held by a company formation agent intending to sell it on
- a company that will never be trading because it has been formed to own an asset such as land or intellectual property
- an existing company that has been – but is not currently – trading
- a company that’s no longer trading and destined to be removed from the Companies Register
Generally your company or organisation is considered to be active for Corporation Tax purposes when it is, for example:
- carrying on a business activity such as a trade or professional activity
- buying and selling goods with a view to making a profit or surplus
- providing services
- earning interest
- managing investments
- receiving any other income
This definition of being active for Corporation Tax purposes is not necessarily the same as that used by HMRC in relation to other tax areas such as VAT, or by other government agencies such as Companies House.
If your limited company has been dormant but is now active, you must tell HMRC within three months of starting your tax accounting period. The best way to do this is to use HMRC’s online registration service.
HMRC have further details on this link
To contact HMRC you will need your Company UTR number and the 3 digit tax office number, then you can use this link to find out contact details for you Corporation Tax Office
When you call, Option 3 is for Dormant Companies and Option 4 is for Active Companies.
Then you will need to write to HMRC to advise them of the change in activity status.
Companies House still require Annual Returns and Annual Accounts even if the company is dormant, but these are obviously easy as there are no changes from the previous year.
steve@bicknells.net
Business Accountant 