FAQs - Owner managed businesses
How should I structure my business?
The business can be run as a sole trade, a partnership, a Limited Liability Partnership (LLP) or as a company. There are different commercial practicalities and tax implications for each of these models. The key differences being that:
- only a company and an LLP are legal entities in their own right
- only a company is taxed in its own right, all the other models involve the owners as individuals being taxed directly on their share of the profits
The reasons behind structuring the business in a certain way may be for commercial, historical or other non-tax reasons. However, it may be that the tax treatment implications are a significant factor in how the business is structured.
Care should be taken when either disposing or giving away part of your share in the business because this may be treated as a capital gains event giving rise to capital gains tax liabilities.
Care should also be taken when members of the same family are involved in the business. Tax legislation may treat such members as “connected parties” when considering capital gains and inheritance tax.
Furthermore, arrangements made between husbands and wives have been the subject of recent HM Revenue & Customs (HMRC) scrutiny. The taxpayers won the Jones v Garnett (Artic Systems) case in August 2007, however it was announced subsequently that the legislation would be changed. This does not rule out planning between husbands and wives, but it does mean that a thorough tax, and possibly legal, review should be undertaken beforehand.
How can I withdraw cash tax efficiently?
There are a variety of methods to withdraw cash efficiently from a business. Usually a combination provides the best result from an income tax point of view.
These methods include:
- salary and bonuses
- dividends
- contributions to a registered pension scheme
- loans to the company
- leasing business premises to the company
- share options schemes
- share buybacks (subject to certain conditions)
- payments to an Employee Benefit Trust
However, it may be that retaining the profits in the business itself, especially if it is a company, provides a better system of retaining wealth in the family. This can be particularly useful in coordination with inheritance tax planning using trusts.
How can I balance roles and responsibilities within the family?
Separating the roles of family members as owners (or owners in waiting) and as managers is a difficult exercise.
In some cases there is no alternative to holding dual roles, especially if the business is starting out or is not very large. In other cases the shareholding in the business may have become diluted over the years so that the “family” ownership has filtered down a few generations and management is wholly or mainly a non-family affair.
What is right for the family and what is right for the business do not always coincide, although one can expect there to be a large degree of overlap. Finding the right balance is often best served by asking whether a decision would be made, but for the family connections involved. However, each situation must be judged on its own merits.
