Contents
Why do people start multiple businesses
The benefits of using a new company vs setting up a trading name
There are many accountants out their rubbing their hands and salivating over the idea of a client setting up another limited company that they can bill them to look after. Unfortunately this means that the advice accountants provide regarding the overall structure of a business or group isn’t always completely independent.
This article is about helping small business owners who are setting up a new business understand when they genuinely need another limited company, or when they can create a new trading name under their existing company or as a sole trader.
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Company Names and Trading Names
What is a Company Name?
A company name is the official name under which a business is registered with Companies House, it will also have a registration number attached to it.
The company name must be unique and comply with the Companies Act 2006.
Sensitive words, such as those that are offensive or suggest special status, are not allowed, this includes words that might be misleading and linked to the medical and legal professions.
What is a Trading Name?
A trading name is a name for a business that is unregistered at Companies House.
Whilst it may not appear at Companies House, it can still be Trademarked.
A trading name can be used in conjunction with a Company of a different or similar name or as part of a Sole Trader business.
Why do people start multiple businesses?
There are several reasons it can become necessary to start a new business instead of working under an existing one, in an ideal world you would want to limit the number of Limited Companies you have as they can be expensive to run due to accounting fees and other costs that are required for a separate business.
Branding & Conflicts
There are often cases where it would be inappropriate for a business to sell two different types of product or service under the same brand. For example, you could consider someone who wants to sell both pet care and pest extermination services.
In this situation it would be very difficult to have a succinct marketing message that covers both products as the messaging conflict between care & kill would confuse customers, so by splitting the marketing effort over two unrelated brands it could be more effective.
There might also be scenarios whereby a business that is suffering from bad PR and reputational issues may want to sell a similar product or service, but under a new company to distance itself from its other venture.
Reduce Risk
Quite often when one business has built up assets and reputation over time and is prosperous, it can be risky to start a new business under the same company. This is because the new business may have risks associated with it and in the event there is legal action against or it gets into financial difficulty, at least it won’t spill out and impact any other businesses in the group and their assets.
It is also common for a separate holding company to be set up from the main business and then have any valuable assets placed in there so they are out of the reach of potential creditors.
Regulatory Limitations
There are some professional bodies that limit the scope of the services that can be offered by a business especially in industries like accounting and the legal profession. It can often be necessary to start the new company to run any out of scope activities through it.
This approach needs to be handled with care as professional bodies don’t look favourably upon members taking artificial steps to circumvent their rules.
Ringfencing business from new partners
Quite often when going into business alongside someone else, you may want to ring fence and protect your existing business assets and only share in the new venture with them. In this instance it wouldn’t be desirable to give a new partner shares in your old business in case things didn’t work out and you needed to separate.
Avoiding VAT
For companies and sole traders where the main source of income comes from consumers or VAT exempt organisations, it can often be appealing to have separate businesses in order to stay under the registration threshold of £90,000. Having to register for VAT for many types of businesses can lead to a pretty series impact to their margins.
Whilst it might seem relatively straightforward to setup another company or run a company alongside a sole trader business, HMRC have extensive powers to target tax avoidance and to combine businesses, and also back date that combining if they believe that an artificial arrangement exists to reduce tax.
It is also worth considering that the costs and effort of running multiple businesses can sometimes outweigh the VAT saving.
Avoiding Business Rates
There are often situations where a new company needs to be set up in order to ensure that the premises that it operates from doesn’t get amalgamated with the other business when it comes to small business rates relief.
This can be vital for a new business as the local council rates can often be 50% of the rental value of the building and by having a second location or a large single location under one company, the entire amount of relief can be lost.
Planning for a future sale
If the plan is to sell off part of the business at some point, it is better to run it under a separate company as it can often be more beneficial from a tax perspective to be able to sell the shares in a business rather than sell the assets and generate a chargeable gain which is then trapped within an empty company.
The benefits of using a new company vs. setting up a trading name
As discussed earlier in this article, setting up a new company can be expensive so it should only be considered if absolutely essential.
Pros
Separate legal entity providing a level of protection for existing assets
Potential tax benefits when selling a business
Cons
Additional accounting fees, insurances, subscriptions and other overheads
Can’t use existing reputation and credit rating to arrange finance
More complicated to manage
Protecting a Name
Companies House information and other online sources can often be very publicly visible which is why business owners need to prioritise the protection of their business name, this can be done in a couple of ways:
Dormant Company
People often incorporate a company which they don’t necessarily want to trade through in order to reserve the company name, this new entity can be held in a dormant state whilst the trading name is used through another company the owner has or as a sole trader or partnership business.
Trademarks
Trademarks can be a great way to protect a logo or other branding in a business, these would need to be registered and careful consideration given to the level of protection needed.
Managing a Limited Company
The main entity in the UK that manages Limited Companies is called Companies House, however it is separated into different entities depending on the country as England & Wales, Northern Ireland and Scotland are in different jurisdictions.
Many of the changes needed to restructure various businesses can be made online at companies, however some are done at an accounting level or via notifying HMRC or changing terms and conditions.
How to Setup a Company
A limited company is usually setup by submitting an incorporation at Companies House, as part of this you will need to declare the shareholders, directors and persons of significant control. The filing fee is usually £50 and you can chose to adopt the model articles of association or provide custom ones.
Transferring a trading name to a Company
Trading names can be transferred between companies and individuals or any combination of the two. The transfer would usually be treated as a sale of the business asset which can trigger a capital gain, however it is possible to obtain rollover relief to defer if no money exchanges hands.
Usually in a case where it is transferred to another company or person at a nominal value of a £1, stamp duty isn’t usually due at this point either.
Terms & Conditions, Contracts and Invoicing
Regardless of how you structure a business, it is essential that anyone you are dealing with understands the underlying legal entity they are dealing with. This is usually achieved by having a notice on a website, adding it to the details of an invoice, on your letterheads or including it in your terms and conditions.
How to Close Down a Company
Sometimes when you do realise that you have too many companies open it may become necessary to close them. Providing they haven’t traded and there are no creditors it can be as simple as filling in a DS01 form to strike off the company.
It is perfectly okay to do this and it shouldn’t effect your personal credit rating, however if there has been trading activity or there are assets and creditors then you may need to talk to any accountant to understand how to transfer them to another entity.
Summary
Having too many companies can be a burden, both fiscally and also in terms of the effort needed to maintain them, however there are clear instances where it can also be advantageous to do so. If in doubt, seeking professional advice can often be a good investment as the benefits can be worthwhile in the short and long term.
N-accounting is a trading name of Northants Accounting Limited and we support many small businesses in Northampton and also remotely throughout the UK. If you have any questions regarding this article or any others we have produced then please get in touch for some tailored advice.
