There is a lot of confusion and misunderstanding about companies. This aims to clear up a lot of that and explain what you need to know about a company if you have never owned one before.
Name
A lot of people get excited about the name – and I appreciate there is excitement with your first company. However, as long as it is not offensive, it generally doesn’t make a difference what you call it.
A shorter company name is easier when it comes time to fill in applications forms.
A company name made up of your initials or name is more likely to be available than a generic property company name. Companies House has a name checker which lets you know if the name is available (which is slightly different to whether it will be accepted or not!)
Branding
I see too many people worrying about branding – and ignoring important things like actually viewing properties and putting in offers!
For property ownership, I can’t see any benefit. If you are a sourcing company, then at a stretch, it might be relevant. Generally, people will see you, your posts, your projects and pictures and so on and know that you are the person in area X to call on if they are looking for a property. What you call the company isn’t going to affect their decision or the quality of the deal.
However, if you are wanting to go down the route of branding – you need to check the domain name is also available. This can make things tricky where one but not the other is available!
Set up
We have a lengthier blog on this but – only set up when you have a deal accepted is the general rule!
There is a lot of free Facebook advice about setting up your company yourself for free. You might save some cost on day 1, but pay a huge price in future for not getting this right. It really is worth getting the company structure set up correctly.
It generally takes us 2 days to get through AML & KYC and get you engaged with another 2 days to get the company set up. In most cases, solicitors would have barely opened a case file, the broker is still asking for fact find information from you and the surveyor hasn’t turned up to do the homebuyers report yet!
Directors
Directors are appointed by the owners (the shareholders) to run the company on their behalf. Directors make the day to day decisions, sign the accounts, deal with the suppliers, customers and banks.
For big companies like Tesco, the directors will get a salary for the role their play. They may have the right to buy shares at a discount.
However, directors are not the owners of the business. They don’t benefit if the company does really well!
Shareholders
If you want to make money – you have to be a shareholder!
The more shares you have – the more you can potentially make!
Typically each share has 1 vote so the more share you have, the more your vote will count at board meetings where key decision need to be made. Having 51% of the shares typically means you have 51% of the votes and thus can’t be outvoted! Shareholders vote and appoint directors to run the company for them.
Joint venture shareholding
Where there are two of you, each with 50% of the shares, there is potential for a deadlock!
This is where having a great shareholder agreement can be worth its weight in gold!
If there are 3 JV partners each with 33.33%, there will never be a deadlock.
But 4 partners with 25% each could result in a 50-50 deadlock split again potentially.
Joint venture generally
There are key, distinct and separate components you JV relationship will cover:
Profit share: You will agree the company structure and this is likely to remain unchanged and determine your profit shares.
Funding: This will be mortgages, directors loan accounts and others. This will change and flex over time and it will affect overall profit (expensive bridging loan will reduce profit while an interest free family loan will result in increased profit) but not change the profit share.
Management: This is the directors’ duties and all, or some, of the shareholders may be directors.
Mortgages
The mortgage market changes all the time, so talk to your broker.
As a rule, there can be up to 4 shareholders. After this, lenders will decline to lend as they are not sure who is charge and it starts to look like a collective investment scheme which required FCA regulation.
Be aware, 4x fact finds, due diligence, queries and then independent legal advice will also take longer than if there are just 1 or 2 shareholders. Just be aware of this going into it!
If a shareholder owns less than 20% of the shares, many lenders will disregard them as an insignificant minority shareholder and thus not look to do due diligence on them or require them to sign their life away on the mortgage deed.
Limited liability
A company is a separate legal entity and offers limited liability.
This is absolutely crucial for a sourcing company.
However, mortgage lenders will require you to sign personal unlimited surety that if the debits are not paid you will make good any shortfall. You will need to get ILA – Independent Legal Advice – from another solicitor who will explain to you that you are signing personal unlimited guarantee.
If you bought in your own name, you would have a personal unlimited guarantee in there anyway so other than paying a solicitor c. £200 to tell you what you signing, there isn’t a huge difference.
Compliance
There is more compliance associated with companies. There are fines and penalties if this is not adhered to with some penalties for failing to comply potentially resulting in being locked up in jail. I’m not aware of that having happened – but you don’t want to be the first!
We deal with all of this for you so you can focus on what you need to do to grow your business.
Annual Statutory Accounts
Every year the directors need to produce a full set of statutory financial accounting in accordance with the relevant and applicable accounting standards. This is a legal requirement and will accompany the tax return to HMRC.
A simplified version of the accounts needs to be filed with the Registrar of Companies at Companies House within 9 months of year end. The reason they allow a simplified version is key details like your profit, dividends, tax bill, etc are not disclosed publicly.
Accounts filed to Companies House need an iXBRL tagging to turn the accounts into machine readable data.
Tax rates
Companies pay tax at 19% on profits.
Companies are not subject to Capital Gains Tax – this is for individuals only.
If there is sufficient profit at year end after the tax has been paid, a dividend to the shareholders can be made. Currently, the first £2,000 a year of dividend income is tax free in the shareholders hands.
Funding the company
There are a few ways to fund the company.
Shares: Generally, this money it tied into the company and can’t be extracted so the general rule is to put as little as possible in. This is usually £1 and it is gone forever.
Directors loan account: Directors or shareholders can lend the company money. They can make one lump sum or drip feed the company the money as and when they need it.
Mortgage loans: This and other formal bank loans and borrowings can be used to fund the company.
Retained profit: The profit for the year, after tax has been paid, can stay in the business if not paid out and be made available for use in growing the business.
Extracting profit
There are a few ways to take money out the company.
Dividends: there has to be profit in order to take dividends
Payroll: We can set the company up as an employer and thus you can take some payroll. This is ideal (from a tax efficiency perspective) where one of the parties does not work or has a low income. Brokers don’t like income from a property company and prefer it form another source.
Repayment of your directors’ loan account: This is subject to and limited to how much you put in. All withdrawals are tax free which is great from a tax perspective – but no good from a broker / earned income perspective.
Interest: Again, if you have a loan account to the company, you can charge interest on it. This is not often done but it is an option. Just be aware that the company will need to register for CT61, withholding tax deducted and a return submitted.
Efficient profit extraction
A combination of the above can be used to be as efficient as possible with profit extraction. You are reminded about the point above – having the right company set up can make a huge difference at this point.
