It’s pretty straightforward to set up a limited company on Companies House. However, getting the right structure for your property business goals and tax planning is more tricky. In this blog, Provestor’s Head of Tax, Nadeem Raziq, and FCLS Director, Steve Blackmore, explain why it’s so important to structure a company correctly from day one and look at 3 common mistakes made with DIY incorporations.
We’ve helped many clients who, after setting up their company themselves, realise that the basic structure offered by Companies House is not suitable for their needs. We work with corporate law agency FCLS on complex company structures to ensure that our clients’ limited company is future-proofed for their long-term plans.
Steve: “As a company law agency we see many issues with companies incorporated directly through Companies House where the right advice has not been obtained.”
Nadeem: “We understand that clients are sometimes overwhelmed with all the legal requirements when purchasing a property, as well as the excitement to get the property over the line. However, it is key to ensure you take time in understanding the consequences of setting up a limited company.
“The short terms gains of quickly setting up a limited company, are often felt soon after by clients when they realise the company has not been set up tax efficiently for them or indeed their family members. We suggest you speak to an advisor to ensure your business is future proof in terms of your property planning goals, as well as your family planning goals.”
Unless you have unusual circumstances, the number of shares issued for your company is typically 100 and the value of the shares is £1 each. These are often described as ‘ordinary shares’ and give flexibility for a future sale or transfer. The share allocation is split amongst the shareholders and this split will determine the proportion of profit each will receive if dividends are agreed and paid.
Steve: “[We’ve seen] companies which are formed with the wrong share values, for example £1000 nominal value rather than £1 nominal value and companies where class shares have been created but the articles are silent on the rights of the classes.”
Nadeem: “Many clients underestimate the importance of having a number of shares in place on incorporation. I see on many occasions when clients have one share in a company or two between husband and wife. This restricts what you can do with these shares in the future as all the equity is held in two shares. You should create at least 100 shares which allows you to sell, transfer or gift small elements.”
Shareholders have voting rights and influence over the running of the company, and are paid dividends based on the number of shares they hold. It’s a crucial part of ensuring your business is running as tax-efficiently as possible, so you need to set up a distribution of company shares that works for you and your goals. It’s common for spouses, and even children, to be shareholders and receive a share of the company’s profits.
Nadeem: “It’s important to ensure the correct percentage is held by each shareholder and the share of class reflects what they want from the company. Some advanced investors prefer so-called 'smart' structures, with alphabet, growth and freezer shares.
“Growth/freezer shares allow you to plan for the future growth of the company and elect which share class can benefit from the growth of the company. These should be considered when you have children or wish to introduce children to the company at some point in the future.
“Alphabet shares allow a company to assign shares with different classes (identifiable by a letter), for example to pay different dividends or to give certain shareholders decision-making powers.”
‘Articles of association’ are rules about how the company will be run which are agreed by the shareholders, directors and company secretary. You can either write your own or use model articles, which tend to be ok for very basic portfolios with a spouse share structure. However, for more complex share structures, we recommend using a specialist to draft bespoke articles.
Steve: “One of the problems with formation is that, in most cases, the model articles are used. These are a basic government draft which, due to the haste in which they were drafted, are not the most watertight draft. There are no share class rights other than the ability to have share classes, only basic transfer provisions are detailed and there are no clauses allowing forfeiture if shares are unpaid and many other provisions that were popular in the previous Act. It is always advisable to think long term so pre-emption rights on transfers may be something to include or bad leaver/good leaver provisions to detail a procedure for an exiting employee. None of this can be done through the Companies House online filing.
“Some agents (but not all) have their own draft articles that are drafted by lawyers and settled by leading council. They are a stronger set of articles that amend the model articles and can be drafted to suit the company and its requirements.”
Nadeem: “We are seeing more and more complex relationships between investors and non-connected parties purchasing properties together. It is essential that your articles stipulate how the company is run, governed and what your share class represents with regards to your investment.”
“When you’re working with non-connected parties you want to have an exit strategy in place to understand what your shareholding can do and what it can’t do. Having the right models and articles - essentially your protections - in place from day one is critical. It could be that in 12 months time you’re having an awkward conversation with your fellow shareholders!
“Also, consider the value of your portfolio in the future - you could be looking at a seven-figure sum for your portfolio value. That’s when you don’t want to discover a mistake was made back at the start of the company.”
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Steve: “Sadly a fair amount of business that we deal with is correcting new formations that have been set up incorrectly, so it is important to hit the ground running from day one with the company formed as you wish it to be. An Agency can also advise on the company name and on the basic set up as to share capital and share structures linking in with the company accountant and tax advisor to ensure the company is set up correctly.”
Nadeem: “My advice is always the same. A company is formed once, so make sure you get it done right by allowing specialists to do this for you.”
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