Finance: Going limited

Kay O'Reilly, of chartered accountants Chantrey Vellacott DFK, explains why you should consider transferring your business to a limited company.

Have you noticed a change in how your customers behave? They no longer go for a beer after work - they have a "board meeting". The gaffer is now referred to as "Mr Chairman". What on earth is happening?

The fact is that, because of the tax breaks that are possible, increasing numbers of small businesses are becoming incorporated - going limited. For certain businesses, including pubs, the financial advantages make it a move that is certainly worth considering.

Sole traders and partnerships​

Most independent publicans run their business as either a sole trader or in a partnership. In very simple terms, you sell beer and other products, hopefully make a profit, pay tax on those profits and what is left over is yours. You personally own the assets of the business and you personally are responsible for settling the debts of that business.

For many this creates two main issues:

• Firstly, if something goes very wrong, regardless of whether it's your fault or not, you personally may have to bear the costs. Every asset you own is at risk.
• Secondly, you pay income tax and national insurance on all your profits, even if you don't draw all of the profits you make. If you need to retain assets in your business, for example for future development plans, the payment of large tax bills can be a troublesome burden.

Limited company​

If you put your business into a limited company you are effectively removing it from the other assets you own.

You will no longer personally own the business. What you will own is the share capital of the limited company which, in turn, owns the business.

The value of your shares will be directly related to the success of the business. The shares will hopefully go up in value but they may also go down in value.

However, as a shareholder all you have at risk is the shares you have in the company. This is just as true for the largest plc as it is for the smallest company.

The recent problems with the stock market highlights this. You may feel aggrieved that your shares in Widget plc have plummeted in value but you do not have to worry that the chairman of Widget plc is going to knock on your door and say "We've had a really bad year, you've got to sell your house to help out".

Taxation​

Recent changes in the taxation system have, for many businesses, made limited companies more "tax friendly" than sole traders and partnerships. For example, a sole trader making a profit of £20,000 can expect to pay tax and national insurance totalling £4,480. In a limited company, based on income from dividends and salary, the tax you pay might be as little as £1,980 - that is a saving of £2,500.

Is a limited company right for you?​

From a purely tax-saving point of view, most profit-making businesses would benefit from trading as limited companies. The limited liability for shareholders can also be very attractive and a persuasive argument for a business to trade as a limited company.

It is not all positives, though, and there are several factors you need to consider before taking the plunge.

• Trading as a limited company requires discipline in terms of keeping personal and company finances separate. For example, a limited company needs to have its own bank account.
• The personal use by directors and shareholders of company-owned assets could result in tax bills, for example tax on company vehicles.
• If you operate the pub as a leasehold, tenancy or franchise, the agreement of the franchisor or landlord may be required.
• Your licence, too, may need the agreement of the licensing authority before you can become incorporated. This will usually require the backing of personal guarantees.
• Finance providers who would previously have been provided with personal guarantees will need to give consent to the change. Further personal guarantees will again be required.
• Your future plans for the pub may effect the decision. If, for instance, you intend to sell-up in the near future, it may be that for tax reasons you should not incorporate your business.

Seek advice​

Before you make any decisions you must seek professional advice. Speak to your accountant or financial adviser and discuss with them whether becoming a limited company is right for you and your business.

Then, who knows? One day you may join the Company Club and be the Chairman of the Board!

How to incorporate your business...​

• Discuss the possibility thoroughly with your accountant highlighting anything that might go wrong. As well as advising you whether you will benefit, an expert should help you to avoid any problems that might crop up during the incorporation process
• You will need to pick a name for your company and make sure that it isn't already registered at Companies House - simply done on the internet by visiting the website at www.companies-house.gov.uk
• You can also register your name online for a small fee
• Appoint yourself as director and somebody else as company secretary. Your accountant will do. Record the appointment at your first board meeting
• Complete the relevant forms which will register your directors and tell the Inland Revenue what you've done
• Open a bank account for the business. To help choose the most suitable account for you, check out the British Bankers Association website at www.bba.org.uk
• Print new headed notepaper and proper invoices which should carry the full company name, the word "Limited", your registration number and office address and country of incorporation.

Kay O'Reilly can be contacted on 01604 639257 or email pubs@cvdfk.com​