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> Managing your Property with a Private Limited Company |
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Article kindly provided by Graham Phelps
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Many property companies, apart from very small concerns,
are increasing becoming limited liability ('limited'
for short') companies. This has several implications
so far as property development is concerned. Firstly,
a limited company has a legal identity of its own,
ie. it is a 'person' in its own right. It can own
property in its own name. It can sue or be sued. It
has a tax liability and similarly may benefit from
certain tax advantages.
Companies can be formed through an accountant or
a company formation agent. It's usual, with this type
of company, to form it as a so-called '£100
company' issuing 100 shares to the owners or shareholders
worth £1 each. The importance of this share
capital structure is that, in the event of any loss
or bankruptcy, the shareholders will only be liable
for £100. Thus, forming a limited liability
company is a very good way of protecting yourself
from financial ruin should a project go badly wrong.
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All
limited companies must have at least one director.
Directors do not have to be shareholders, although
they usually are. The directors form a board
to run the company and can act as they see fit,
although shareholders can remove them at the
AGM or other occasions if they so wish. He or
she who owns the majority of the shares effectively
controls a limited company.
A
limited company is a very good structure for
syndicates. This offers liability against losses
to the shareholders. It also means that shareholders
can benefit from an equity stake in the company,
yet at the same time delegate day-to-day running
to the director or directors.
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These
are some of the additional benefits of setting up
a limited liability company, so far as property
development is concerned :
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Loans, overdrafts and mortgages can be arranged
in the company name, although named directors
might need to be personal guarantors.
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Capital
can be raised by selling shares. For example,
if initial results are good you may be able to
sell your £1 shares for several hundred
pounds each. (Note you cannot openly advertise
shares on the market, for example in your syndicate
advertisements, unless your company is formed
as a public limited company or PLC, so it has
to be done by word-of-mouth.)
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The
founder can keep overall control of the company
although he/she may only have injected a proportion
of the capital.
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It
is possible to recapitalise the company by issuing
new shares. For example, to bring in new investors
and raise capital for bigger and better projects.
There are, however, a number of disadvantages of
setting up a company in property which must be considered
:
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The
requirements to prepare annual accounts and file
them with the Registrar of Companies create extra
expense.
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A
company often has limited credibility with lenders,
since its liability to repay debts is limited.
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A
company often has limited credibility with suppliers,
until it establishes a credit history.
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Your
company will be liable for Corporation Tax (CT)
on its profits. (Although this can be an advantage
if you are a higher rate taxpayer.)
Always talk to your accountant or trusted advisor
before making this decision.
Please
contact me for any questions or comments
Graham
Phelps
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