TAKE IT TO THE LIMIT
Page 34
If you've noticed an error in this article please click here to report it so we can fix it.
Like it or not, every operator has to be a businessman as well as a haulier, and how a company is formed can be as important as finding the right people and trucks.
• Just why and when to form a limited company can prove a complex and confusing problem for truck operators. A great deal of misunderstanding surrounds the subject, and even accountants disagree about how best to deal with a particular case.
There are three principal ways to operate a transport business: as a sole proprietor, as a partnership, or as a Limited company. Each method of operation has its advantages and disadvantages, depending on the circumstances of a particular business.
The UK currently has around a million sole proprietors or partnerships, and more than 800,000 limited companies involving nearly three million directors. So how do you decide what is best for your company?
SIZE OF BUSINESS
Anyone in the haulage industry will know how complicated their affairs can become even if they only have one or two employees. As a business grows larger, its affairs become ever more complicated.
The more formal rules that govern the management of a limited company are better suited to a larger business. A simple rule-of-thumb guide would be for any haulage business with a turnover in excess of £250,000 to be looking closely at the advantages of a limited company because a business with this sort of turnover can easily absorb the associated extra costs.
A limited-company format for this size of business makes it easier to introduce other members of your family, or employees, into management, perhaps by making them directors. Thus a limited company is much better suited for the more complicated financial planning of a larger business.
REDUCING RISKS
The haulage industry has always been high on the bankruptcy league table. Heavy capital costs and associated overheads make the industry a tough one in which to survive. In addition, fierce competition makes it hard to attain high profit margins. The risks of failure in the industry are therefore very real.
The trading provisions of the new Insolvency Act have reduced the protections for directors of failed limited companies in connection with limited liability.
This used to protect directors from any personal liability for a company's debts, unless they had given personal guarantees. Now, however, if a director continues to trade with a company that he knows is insolvent, he can be made personally liable for that company's debts.
Even so, the limited liability protections are still very considerable, and remain 100% effective for any director who behaves in an honest and diligent manner, so a limited company format remains the best option if you are engaged in some high-risk business activity.
Businesses with limited capital assets should seriously consider the risks they are running. The advantage of a limited company is that it can reduce the personal risk to operators and their families from the terrible problems that could result if the business failed.
If you set up a limited company to reduce risks, avoid offering personal guarantees — especially those of an unlimited nature. Banks are particularly adept at obtaining guarantees from their customers who run limited companies.
PARTNERSHIPS
The general rule is to avoid forming partnerships. All the partners of a business are liable for the actions of any other partner, however foolish. It is important to realise that each partner is responsible for all the debts of the business, which are not distributed equally. If a partnership fails, it will be the partner with the most assets who will lose the most.
Unless you are totally sure of your partners you should never consider forming a partnership, even with members of your own family. Partnerships that fail are among the most distressing of all business failures.
It is common for professional groups Like doctors and accountants to form partnerships, but these groups enjoy important financial and other advantages: in the ordinary commercial world, they are best avoided.
By taking equal shares and responsibilities in the running of a limited company, individuals effectively set up a partnership without suffering the disadvantages.
TAXATION
The treatment of limited companies and sole proprietors for tax purposes can be very different. The pros and cons of the tax position will depend on your precise circumstances, and operators should consult an accountant to discover whether they would pay more or less tax.
Much confusion surrounds the relative treatment of limited companies when compared to individuals and partnerships. The tax side needs to be looked at very carefully. As a rule of thumb, from a tax point of view a larger business will benefit from being a limited company.
TIMING
Those already running their own businesses, as sole proprietors or partners who wish to change to the limited company format must time the change carefully. If an existing business is closed down (which is what happens if a straight change is made) then the British tax system may produce extra tax bills, as all earnings are then assessed up to the date of the change. Businesses continuing normally work a year in arrears as regards taxes due on profits.
The timing of the change also needs consultation with your accountant. It might even be a question of making a gradual change running both types of business fora while.
FORMATION
Forming a limited company is very easy: there are three ways in which it can be done.
What are known as "ready-made" companies can be bought from specialist firms who advertise in magazines and newspapers. Generally they can be formed in a few weeks and should cost around £100.
Your accountant can also form one for you. He will charge you more, but will probably provide you with more paperwork and associated advice. Ask his charges — if they are not excessive then you would be advised to use him. If you like dealing with paperwork you can actually set one up yourself for around 250. Oby John McQueen