Year-end planning for business owners.
This month, Jack Posner (principal) and Darren Stone (manager) of Leon and Company Chartered Accountants in Leeds write how changing the structure of your business can pay dividends.
With the new tax year finally under way, and Spring around the corner, it seems like a good time for taking a fresh look at how we run our businesses. For those of you running a sole-trade business or partnership, it might be time to review your business performance and consider transferring your trade into a limited company. In this editorial, we give you some insights into this.
First things first. A limited company is an independent legal entity whose shares are owned by shareholders. The primary advantage is that it limits the shareholders’ personal liability, and normally ensures an individual’s assets are safe.
If your trading business profits are sufficient, then trading through a limited company can help to significantly mitigate your tax bill. By making yourself an employed-director and shareholder of your company, you can take a combination of a director’s remuneration and dividends from the profits. The salary itself is fully tax-allowable, and will reduce the company’s own profits, and therefore minimise the company’s own tax liability, which is only 20%. Various salary/dividend combinations can be taken to minimise your own personal tax liability, and in some circumstances, even to nil.
Should you decide to ‘incorporate’ your sole trade into a limited company, then you are effectively selling your trade and assets to the new company. There are tax issues, such as Capital Gains Tax, to consider, and careful planning is required to minimise this.
On incorporating, you may have to consider that your business may have an inherent value – this is known as goodwill, and is the amount a third-party would buy your trade from you on the open market. Your new company would buy this goodwill from you, and can potentially relieve it against the company’s profits. Moreover, if the new company purchased this goodwill from you in cash, then you are free to draw down on this at any time with no tax implications.
There are a multitude of issues to consider when treading this path; however, professional advice should always be sought before making any decisions. Incorporating your business can often be a good move, and if done right, can literally pay dividends.