Continue as a partnership or go Limited?

[Mick Dastardly]

Hi all, my wife and I own a couple of small businesses and for the last few years our profits have been around £100k, meaning sometimes we pay some 40% tax and sometimes we don’t.

Due to a change in circumstance our ongoing profits will double to at least £200k p.a., which is making me look a lot closer at our tax liability.

I haven’t spoken to our accountant yet, but asked the question of google Gemini that wrote a referenced report saying that we’d pay more tax as a Ltd. company, which I found surprising.

So my question is, has anyone moved from sole trader/partnership to Ltd. for favourable tax reasons, and how has it worked out for you?

Thanks in advance.

[jonsp]

Congrats on the upturn in your business. As a ltd company you can pay yourself via some combination of PAYE salary as an employee and/or dividends as a shareholder.

A PAYE salary is subject to income tax and NI. Dividends pay a lower rate of tax and are not subject to NI. But salaries are tax deductible dividends are not.

I'm 99% sure your accountant could run the numbers in a way that your tax would be lower as shareholders/directors of a limited company.

[PoorCarCollector]

A big positive for running as a Ltd company is the ability for the company to pay up to £60k each per year into a pension for both of you. This reduces corporation tax for the company and obviously a huge benefit for you both personally

A massive win win!

[MaxFromage]

As a standard partnership versus limited company, you will pay more tax as a limited company. However there are often many moving parts in these calculations which only your accountant can do. Plus of course it could all change in October.

[Mick Dastardly]

Thanks for the replies. The pension suggestion is a moot point though as we haven’t much in the way of a pension pot, and have made alternative arrangements to fund our retirement.

[OllyAitch]

We switched from partnership to Ltd a couple years back when profits went up, and for us it made sense once we factored in dividends, salary split, and a bit of extra pension planning.

[Mick Dastardly]

Any more input on this from the forum accountants?

I’ve asked mine but still waiting on her getting back to me.

[Mr Pointy]

Mick Dastardly said:

Any more input on this from the forum accountants?

I’ve asked mine but still waiting on her getting back to me.

Are you operating as Sole Traders or a Partnership? If it's as ST you might want to read through the MTD thread:

https://www.pistonheads.com/gassing/topic.asp?h=0&...

Also note this question might get more traction in the Business sub-forum.

[Abc321]

Qualified accountant here. Without knowing all the details, I would advise going limited based on the following.

1. If your profits are to be circa £200k, then I imagine* there will be some relatively significant monthly outgoings which most** people would prefer not to be personally liable for.

2. You avoid having the headache of ITSA MTD being Ltd rather than Partnership.

• I don't have all the relevant info so am assuming here.

• Again, assuming (PH - Because Pedantry Matters)

[MaxFromage]

Mick Dastardly said:

Any more input on this from the forum accountants?

I’ve asked mine but still waiting on her getting back to me.

As I said, we can't answer it without knowing far too much personal information.

[MaxFromage]

Abc321 said:

2. You avoid having the headache of ITSA MTD being Ltd rather than Partnership.

There is currently no start date for MTD for partnerships.

[Eric Mc]

This is a question that is often asked of accountants.

On the whole, the tax and NI savings that used to be obtained through running a limited company are now gone. However, there are still some advantages to be obtained by running a business through a company.

Essentially, having "limited liability" is a benefit in that protects your personally owned assets. Of course, we now have "LLPs" as well (Limited Liability Partnerships) but if you want limited liability I still think setting up a limited company is the easier option.

Having a limited company does give you more flexibility reagrding how much PERSONAL income you want to draw out of the business and, by default, the type of tax and/or NI you end up having to declare and pay.

Regarding Making Tax Digital, neither partnerships nor limited companies are going to be included in this (totally stupid) system for the foreseeable future. So, having a limited company is a good way of avoiding the hassle - for the moment at least.

Partnerships or directors won't need to comply with MTD rules either although individual partners MIGHT have to comply, depending on their other sources of income.

[Mick Dastardly]

Abc321 said:

Qualified accountant here. Without knowing all the details, I would advise going limited based on the following.

1. If your profits are to be circa £200k, then I imagine* there will be some relatively significant monthly outgoings which most** people would prefer not to be personally liable for.

2. You avoid having the headache of ITSA MTD being Ltd rather than Partnership.

• I don't have all the relevant info so am assuming here.

• Again, assuming (PH - Because Pedantry Matters)

Thanks for the reply. Our business is a simple one, we have never been exposed to any significant debt( a grand here or there in our early days), so the ltd. Protection is irrelevant to us.

Fixed costs(wages, utilities, etc) this year are going to be c.33k.

Our fixed income this year will be a minimum of c.51k, and could be 5-10k pm more.

The vast majority of this income is government funded, so is pretty much ring fenced.

I spent an hour talking to our accountant this afternoon, and whilst she’s been good for us for 20 odd years, I have no fking idea what she ever waffles on about.

Hence this thread.

Edited by Mick Dastardly on Thursday 14th August 23:26

[Mick Dastardly]

MaxFromage said:

As I said, we can't answer it without knowing far too much personal information.

Feel free to ask away, I’ll tell you everything I’m comfortable with doing so for your advice.

[Eric Mc]

What spefically are you trying to achieve?

Lower taxes?
Less exposure to financial risks?

Ordinary partnerships offer no limited liability if things go pear shaped and your personal assets are at risk. Also, each partner is jointly and severally liable for each other debts.

So - if you are happy to continue with this arrangement, then stay as a partnership. Debt is not the only risk that a business might have. Think of all the things that your business does that could cause physical or financial damage to those you are doing business with.
Some business risks in a partnership can be mitigated by having proper insurance in place.

As I mentioned earlier, operating through a limited company can give you a bit more flexibility regarding how much PERSONAL tax you end up paying as it is your decision as to how much money you personally withdraw from your own company - whether through salary, dividends, pension contributions etc.

[Mick Dastardly]

Thanks for the reply Eric.

To clarify, I’m approaching this purely from a tax efficiency POV; in a nutshell would we pay less tax if we were Limited?

[Eric Mc]

Mick Dastardly said:

Thanks for the reply Eric.

To clarify, I’m approaching this purely from a tax efficiency POV; in a nutshell would we pay less tax if we were Limited?

In theory, you CAN reduce your tax liability through a company. However, as I keep saying, it's the flexibility that a company provides that allows you to control your personal tax liability a bit more.

If a partnership of two equal partners makes a profit for the year of £200,000 - each partner will have to pay Income Tax and NI on £100,000 each. And that's it.

If a limited company makes a profit of £200,000, it pays Corporation Tax on the £200,000. The directors/sharholders will pay Income Tax and NI on the money they extract for themselves from the company. It is up to them to decide how much and in what manner they extract their money - so they have an element of control over their personal income levels and the tax and NI they will pay on that personal income.

Limited companies just give you more options.

There are downsides to limited companies. Company accounts are more complex than partnership accounts. They have to comply with Companies Act requirements and need to be filed at Companies House. Obviously, accounts and tax returns for the company also need to be filed with HMRC. This would be in addition to your own personal Self Assessment tax returns.

Generally, the admin and related costs for a limited company are higher than for partnerships.