Q: My business partner and I are setting up a web service with a model based on advertising and subscriptions. We have very limited funds for accountancy/legal support. Do you think being a limited company or a partnership is best for us?
Mar 07 2009
Answered by: Clive Lewis Ask a question
You do not give any details of your aspirations in terms of business growth and ultimate size, so this answer must be very general. Whether you trade as a partnership or as a limited company is a key decision on starting a business. If the decision is to start as a partnership, it is prudent to review the situation after the business has become established.
Basically, a limited company provides opportunities for saving tax but it involves a significantly higher level of bureaucracy which either you must undertake or you pay others to undertake on your behalf.
Partnership implies unlimited liability for the debts of the business unless it is a limited liability partnership (where one of the partner’s liability is limited). A limited liability company might also be advisable if the business venture is particularly high risk.
Forming a limited company has a number of implications particularly in terms of taxation of profits. There are a small number of ways you can take money out of a limited company – by dividends out of profits, a salary which is subject to Pay As You Earn (PAYE) and National Insurance Contributions (NIC) or repaying a directors, loan account which is in credit.
A partnership, on the other hand, means you can take money out of the business as frequently as you like, provided it does not leave the business short of funding. If you form a partnership, you would be advised to prepare a partnership agreement which specifies the amount each partner can take out of the business, such as the share of profits and losses, the amounts contributed to the setting up of the partnership.
The forms required will also be different. A company will be required to file a corporation tax return with HM Revenue & Customs (HMRC) and annual accounts in the proscribed legal format must be prepared and delivered to Companies House. The accounts filed must comply with the statutory requirements. You would need to be aware of the deadlines for completion and submission of the company’s returns to HMRC and Companies House as there are penalties for late filing.
A partnership on the other hand, is required by HMRC to prepare the “Partnership” return as part of their personal annual tax return as well as preparing a joint “Partnership” tax return, which basically tells HMRC how the profits (or losses) of the business have been shared between the partners. The individual Partnership return requires a profit and loss account and balance sheet but if the turnover (sales) is less than £15,000 the requirements are simplified.
The payments of tax are also very different. Corporation tax (for a company) is paid nine months after the end of the financial year whereas for a partnership payments of income tax and Class 4 National Insurance Contributions are made twice a year – on 31 July and 31 January based on a payments-on-account system. In addition, basic Class 2 National Insurance contributions are paid monthly, usually by direct debit.
Being a limited company has other advantages, for example it makes it easier to transfer a share of the business to a new investor. A limited company format is probably appropriate where a venture is high risk.
For a limited company, HMRC requires the corporation tax return together with full limited company accounts i.e. they will not accept abbreviated accounts which small companies can file with the Companies House. For smaller companies, the accounts for HMRC will usually comply with the Financial Reporting Standard for Smaller Entities (FRSSE).
The corporation tax return together with the above information must be submitted to HMRC within one year of the accounting year end. The corporation tax computation must also be included. The role of the computation is to provide reconciliation between the taxable profit and the accounting profit including such differences as the adjustment between the depreciation charge (in arriving at the accounting profit) and the capital allowances (in arriving at the taxable profit).
The corporation tax return and the accounts can be filed with HMRC online but the accounts and tax computation must be in a form which can be attached to the corporation tax return. They can also be submitted through the post.
This can only be a very general response. You would be well advised to discuss your particular circumstances with a chartered accountant who can advise you in detail. You can find one on the The Institute of Chartered Accountants in England website.
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