Like, you know, a company can have multiple trading names. Like, you know, N Accounting is a trading name of Northants Accounting Limited. So, why can’t one person, a person just have a company with lots of different trading names, if they’ve got lots of different businesses. And today’s video, what I really want to cover is the pros and cons of setting up multiple companies. But also I want to talk about when it’s appropriate, when it’s not.
So, let’s just quickly talk about the cons of setting up multiple companies. Well, ultimately, it just creates a lot more work. It creates more work for your accountant, which probably costs you more. It creates more work for you because there’s more things that need to be done in the business. It’s more expensive because you often have to have Multiple different insurances and you don’t necessarily get those economies of scale.
You’ve got to pay for lots of different versions of the same software, essentially and it can be a more expensive way of doing things. So let’s talk about why people do it. And let’s talk about when they don’t necessarily get that right. Quite often, when people are setting up another business avenue, they will set up another limited company.
And the main reason for that is if that new business that they’re setting up is so different from the other business, then quite often they don’t want the risk of one business being linked to the risk of the other business. If you had two different businesses and let’s say one was actually quite risky and one wasn’t, and they were both in the same company. If something happened to one business and it wasn’t covered by the insurers, it would actually impact the other business. And that could be that’s quite a challenge for a lot of businesses. So that’s one of the reasons people do set up multiple companies to actually separate that risk.
But another reason people do set up multiple companies is because there’s a difference in the shareholdings like of those businesses. Like for example, someone might own one business and they might be the sole owner of that business and doing all the work for that business and then let’s say they get into a joint venture or they open up some other kind of business that they’re in partnership with someone else. Well, quite often the person with our original business doesn’t want to give away half of a established business and new business partner coming in. So what happens in that case is they might set up a second company, which they co own with the new person coming in and then they keep the initial business separate, which is their own asset and their own nest egg. So that can be another reason because quite often when there’s like a new mix of partners in a new venture. But then it makes makes sense to do that and sometimes, you know, people create a separate company because they want to separate their brands.
They might be doing something which is which has a premium brand, but they might create another version of that, which is like more mass produced and at a less premium pricing and they want separate companies. So people can’t easily see that actually the same company is selling that expensive thing and that cheap thing and those can be really good reasons for why people set up those multiple businesses.
Sometimes it can actually just be for legislative reasons. There might be reasons why one kind of business can’t do the kind of work that another kind of business does and then they have to be separated for that. Or there could be certain contracts in place which prohibit, like, a certain kind of work being done through that limited company. So that’s another reason. And one of the things people really need to be careful of, and they don’t always consider it, is setting up another limited company just to avoid VAT registration isn’t always as straightforward as it sounds.
And the reason for that is HMRC has the power to combine businesses if they think they’re essentially the same business in terms of VAT. So, having two businesses where you’ve got 70k of turnover each, if HMRC thinks they’re essentially the same business, they do have the power to say, actually, let’s combine them, that’s 140k turnover.
Let’s backdate that combination so you owe, the owner owes taxes for the last seven years. HMRC can do that. There’s do’s and don’ts around that. That’s a whole other video. But that’s one of the key things. And also, one of the things people really need to be careful about is splitting a business to try and reduce their business rates as well.
Like, you know, if they’re moving, if they’re opening up a premises down the road and opening up through another limited company so they don’t necessarily have to pay the additional business rates that can also be a challenge if the council figure it out. So, I mean, that’s something to factor in as well.
So, this has just been a short video giving you a bit of an explanation why people sometimes split a business or have multiple companies rather than just like, you know, that one company. And it’s definitely worth thinking about because one thing I just would like you to take away from this video is only open up a company if you absolutely need to.
Companies are easy to open, they’re hard work. to look after. Not that hard if you’ve got an accountant like us, but they do take more work and expense. So there is no point in creating a company unless it’s actually needed. And and it’s well worth bearing that in mind. Just remember, if you found this video useful, you can go to our website, book a call with me, and I’ll see you in the next video.