SETTING UP A BUSINESS IN THE UK: PRIVATE LIMITED COMPANY, LIMITED LIABILITY PARTNERSHIP AND UK HOLDING COMPANY – SOCIÉTÉ GÉNÉRALE PRIVATE BANKING HAMBROS & BERKELEY LAW
The French team at the Société Générale Private Banking Hambros (SG Hambros) is happy to work with Berkeley Law to deliver a series of five articles to French Connect London (‘FCL’) members.
Various topics will be covered to accompany the French Entrepreneur life cycle in the UK.
- Moving to the UK: UK Resident Non-UK Domiciled: the Remittance Basis of Taxation and pre-arrival and ongoing UK Tax planning
- Setting up a business in the UK: UK Ltd, Limited Liability Partnership (‘LLP’) and UK holding Company regime
- Investing in the Business: Business Investment Relief, Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT)
- Exiting the Business: Entrepreneur relief and Wealth planning solutions
- Exiting the UK: Your exposure to UK tax on death and on ceasing to be UK Resident
Berkeley Law is an independent legal business providing bespoke wealth advisory services to international private clients and the institutions that serve them. In particular the firm’s French team advises French and Francophone clients on their UK tax and succession planning issues; its bilingual lawyers are experienced in providing such advice in the cross-border context.
SG Hambros is the UK private bank of Société Générale. Our bilingual private bankers specialise on French individuals resident in the UK but also relocating or exiting the UK. The French team, together with the assistance of our experienced international wealth planning team, offers onshore and offshore services, from bank accounts segregation, investment and wealth planning solutions.
Setting up a business in the UK: Private Limited Company, Limited Liability Partnership and UK holding company
This article details some of the material factors that an Entrepreneur will need to consider when setting up a business in the UK. It focuses solely on the UK business structures that are available and more particularly on the private limited company, the limited liability partnership and the UK holding company.
There are essentially four key business structures available in the UK to start-up entrepreneurs, all of which are treated differently for legal and tax purposes. They are:
- Sole trader;
- Private limited company; and
- Limited liability partnership (LLP)
While it is true that in certain industries the choice of business structure may be dictated by commercial practice, it is often the case that a business ends up in a certain structure by accident. If this happens, you may miss the opportunity to tailor your business to maximise advantages not only for your business but also for you personally. In the worst case scenario, choosing the wrong business structure may impact on the growth of your business.
Your choice of legal structure will affect:
a) which authorities you have to notify that your business exists;
b) the tax and national insurance that you pay;
c) the records and accounts that you have to keep;
d) your personal financial liability if the business runs into trouble;
e) the ways your business can raise money;
f) the way management decisions are made about the business; and
g) the level of public disclosure.
A sole trader is an unincorporated business. You are treated as self-employed. This means that you and your business are effectively one and the same. However, this does not mean that you have to work alone and you can still employ staff.
As a sole trader, you are responsible for any debts the business incurs and the profits you make are taxable directly on you at your marginal rates of taxation even if you do not technically pay yourself a salary.
You are responsible for registering your business with HMRC and you must also register for VAT if you expect your takings to be more than £82,000 in any 12 month period (the 12 month period is calculated on a rolling basis).
An ordinary business partnership is similar to a sole trader but you are in business with other people. Each partner is personally responsible for his share of the business profits and debts in accordance with the partnership agreement.
Unlike private limited companies and LLPs, partnerships are not registered on any public register.
For tax purposes, partnerships are generally treated as transparent: each partner is personally taxed on his share of the profits and transactions of the partnership.
Similar requirements as with sole traders apply to registering with HMRC and making sure you are VAT compliant.
Private Limited Company
A private limited company incorporated in England and Wales has a distinct legal personality. The company will be liable for its own debts and contractual obligations and can sue and be sued in its own right in the English courts.
There are two forms of limited company:
- a company limited by shares which is owned and controlled by its shareholders, who have no liability for the debts of the company above the value of their shareholding; and
- a company limited by guarantee where directors or shareholders financially back the organisation up to a specific amount if things go wrong.
Both forms of private limited company will have a board of directors who are responsible for the day to day running of the company. The directors have no liability for the company’s debts unless they have broken the law.
To create a limited company, you are required to register with Companies House. Registration can be done electronically, by post or in person in accordance with the prescribed format.
The costs of registration are as follows:
- Same day service- £100;
- postal applications – £40 (takes eight to ten days); and
- Online applications – £15 (takes up to 24 hours).
To register a private limited company, you will need:
a) a company name – there are rules on what it can and can not include;
b) an address for the company;
c) at least one director;
d) at least one shareholder;
e) memorandum of association – this is the agreement of all initial shareholders (‘subscribers’) to create the company;
f) statement of capital – details of the company’s shares and the rights attached to them; and
g) articles of association – these are the written rules about how the company is run.
Companies House provide precedent forms for the memorandum of association and the articles of incorporation which can be downloaded for free. They come with detailed instructions. Alternatively you can buy an “off the shelf company” from certain providers.
Once the company is registered, you will receive a ‘Certificate of Incorporation’. This confirms that the company legally exists and shows the company number and date of formation. The company and details of its offices, shareholders and accounts will also appear on the Companies House register, which is available to the public.
Once the company is registered, Companies House will advise HMRC who will in turn issue the company with a unique taxpayer reference. You must use this number to register with HMRC for corporation tax within three months of starting to do business. You will also have to register for VAT if the VAT threshold is met.
Having a limited company comes with significant benefits, which include:
a) Tax efficiency for the business – the profits of a private limited company are subject to corporation tax. The main rate of UK corporation tax is now 20%. In 2017, the rate will fall to 19% and, in 2020, it will fall again to 18%.
b) Tax efficiency for the business owner – you can extract remuneration through a mixture of salary and dividends taxed at the relevant personal rates, which is likely to result in lower National Insurance Contributions (the UK social contributions) than a salary alone.
c) Reduced risk – liabilities (debts) of the business are separate from those of the owner(s), reducing the risk if things go wrong
d) Image – a private limited company tends to convey a more professional image of the business to clients and investors
e) Capital raising, exit and flexibility – since equity can be sold, limited companies are more attractive and more flexible when it comes to raising investment and funding.
If you are a UK resident non-UK domiciliary (“RND”), you can also benefit from business investment relief when you invest your own foreign income and gains in a company without causing a remittance of your foreign income and gains to the UK, which would otherwise be taxable in the UK.
This relief extends to any RND looking to invest in a UK business (business investment relief will be discussed in our future articles).
Limited Liability Partnership (LLP)
The LLP is a separate legal entity from its members. It has the organisational flexibility of a partnership and is taxed as a partnership but in other respects it is very similar to a private limited company.
In practice, this means that as a partner in an LLP, you are liable to tax directly on the profits of the LLP at your marginal rate of tax, but you are not personally liable to the debts of the LLP beyond the value you have invested in the business.
To create an LLP you need two designated members at all times but you can have any number of ordinary members. Broadly, designated members have more responsibilities than ordinary members. The members can be individuals or other business entities.
Like a private limited company, an LLP enters in to contracts and can sue and be sued in its own right.
To create an LLP, the partners enter into an agreement which covers:
- how profits are shared among members;
- who needs to agree decisions;
- members’ responsibilities; and
- how members can join or leave the LLP.
Registering an LLP with Companies House involves the same process as with a limited company and on registration you receive a certificate of incorporation.
The increased responsibilities of the designated members include:
- registering the partnership for Self-Assessment with HMRC;
- registering the partnership for VAT if you expect to reach the threshold of £82,000;
- appointing an auditor if needed;
- keeping accounting records;
- preparing, signing and sending annual accounts to Companies House; and
- sending an annual return to Companies House.
Unlike those in private limited company, investments in to an LLP do not benefit from business investment relief.
It is common to use a private limited company as a holding company.
The basic functions of a holding company are to:
- acquire shares in subsidiaries;
- receive dividends arising from the shareholdings;
- defend itself and its subsidiaries from takeovers; and
- dispose of shares in subsidiaries.
In order to qualify as a holding company for UK purposes, the holding company:
- must hold more than 50% of the voting rights in the subsidiary.
- be a member of the subsidiary and have the right to appoint or remove a majority of its board of directors.
- be a member of the subsidiary and, in accordance with an agreement with other shareholders, alone controls a majority of the voting rights in the subsidiary.
Holding companies can offer potential for tax savings, as most share disposals and dividend payments (between holding companies and subsidiaries) are exempt from tax. There is also scope for holding companies to dispose of shares in its subsidiary companies in a UK tax efficient manner.
Overview of business structures in the UK
Solicitor, Berkeley Law Limited
The SG Hambros French team is happy to meet FCL members in one to one consultation to discuss further the above themes (bank account segregation, remittance basis, overseas workday relief). Please contact: Marceline Try, Private Banker SG Hambros, Marceline.firstname.lastname@example.org, +44 7583 038 017.
This document is provided for information purposes only and does not constitute a recommendation or advice. SG Hambros does not represent that such information is accurate or complete and it should not be relied on as such or acted upon without further verification. Tax treatment depends on individual circumstances of each client and may be subject to change.