Inspired by yet another posting on the subject of incorporation. AccountingWEB decided to comission a guide to help you with this challenging and common issue. Nick Antoniou of Smith & Williamson highlights the pros and cons.
The choice of legal status for your business is a complex one and is dependant on a number of tax, commercial and legal considerations, which impact on the business for many years to come. Getting it wrong can have many negative consequences, which are not simply costly in terms of tax, but many practical difficulties concerning future succession and sale of the business. Take time to consider the pros and cons of each option as the time invested at the business planning stage will be of benefit in the future.
Should you operate as a limited company or partnership? Or perhaps go for limited liability partnership (LLP) status, which some believe offers the best of both worlds? It is essential to select the appropriate status for your business, as this will determine a number of other issues including tax, future succession of the business and many other factors.
Whilst it is frequently assumed that incorporation brings substantial tax benefits and greater financial protection to directors, this is not always the case. In fact, for some businesses, running as a partnership can be the most efficient and rewarding route.
Each firm must assess its particular ambitions in view of current circumstances and decide the most appropriate route. Indeed, selecting the best operating vehicle for your organisation is just one part of business planning, but first, let's recap on some basic differences between limited companies and partnerships.
A limited company is a legal entity, run by directors and owned by shareholders, who are frequently the same people. Each company must publish its annual accounts, although small organisations need only provide a basic financial summary and for those with turnover under £5.6 million per annum, no audit is required.
In contrast, partnerships are owned and run by individual partners who are personally and jointly responsible for the actions of their fellow partners which partly accounts for the importance of a partnership agreement or deed. Partnerships do not have to publish or audit their accounts, however large they get, although there is a move towards increased transparency.
A few of my clients have set up a limited liability company to run alongside the partnership to which different types of projects are directed. This affords maximum flexibility and helps the business to protect itself. It can also be a useful means to ensure succession as partners leaving a partnership can result in dissolution whereas a company continues, even when directors retire or leave.
Limited liability partnership, which became available from 6 April 2001, brings the benefits of limited liability whilst maintaining a traditional partnership. Not surprisingly, an increasing number of businesses of all sizes are considering this.
As the members have limited liability, the protection of those dealing with an LLP requires that the LLP maintains accounting records, prepares and delivers audited annual accounts to the registrar of companies, and submits an annual return in a similar manner to companies. The exemptions (and limits) available to companies with respect to delivering abbreviated accounts and exemption from audit also apply to LLPs.
Do you need to limit liability?
The type of work you undertake or your client portfolio often dictates whether or not limited liability is required. Typically, if you have regular overseas projects or work for quite large clients...
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- How much do you want to take out of the business?
- Who should own the business?
- Costs of incorporation
Nick Antoniou, director at Smith & Williamson, the accountancy and financial advisory group. Tel 0208 492 8600, [email protected]
Smith & Williamson is an independent professional and financial services group employing over 1,100 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-size corporates. It operates from offices in London, Belfast, Bristol, Guildford, Salisbury, Southampton, Tunbridge Wells and Worcester. Nexia Audit Limited is an independent company which works alongside Smith & Williamson to complement its specialist financial advisory services.