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bigduckontax
bigduckontax, Accountant
Category: Tax
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Hi. I wish to create a new company with a friend but cannot

Customer Question

Hi. I wish to create a new company with a friend but cannot seem to agree if it should be a limited company or an LLP. we've read lots of different views on the web. We expect the new company to be in profit from day one so which is the most tax efficient.
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.

Limited companies are taxed under the Corporation Tax regime. Effectively this means tax at 20% on profits.

Although LLPs are classed as bodies corporate they are taxed as though they were partnerships so the profits devolve onto the partners' personal tax positions.

The tax efficiency depends upon the individuals' personal tax affairs compared with the limited company's. Some careful calculations may be needed. If the individual goes into a higher tax bracket then they will be paying 40%.
Customer: replied 3 years ago.

Hi Keith,


Thank you for your response.


 


We both already act as Sole Directors under separate Limited Companies, so the CT at 20% is already clear. We're struggling with the efficiency part as you state. If we're starting from a simple personal tax basis for 2014 Tax Year, i read that taking say £50,000 profits through the LTD works out a few % more efficient.


 


How do we go about calculating our relevant positions to have an informed view?


 


Regards

Expert:  bigduckontax replied 3 years ago.

Is that 50K each or between the two of you?

Customer: replied 3 years ago.

Sorry £50,000 each - at least!


Unlikely to be more than £100,000 each

Expert:  bigduckontax replied 3 years ago.
Right, under Corporation Tax regime tax due is 100K @ 20% = 20K tax due. That equates to 10K each.

On a personal level 50K less personal allowance say 40K;

32K @ 20% = 6K

18K @ 40% = 2K

Total tax due 8K each, actually slightly more, but I have rounded the figures.

Actually there isn't much in it, but you would have to leave the money in the company. If you took it out it would enter your personal tax computations, but you could actually spend it on riotous living!.
Customer: replied 3 years ago.

Thanks Keith.


 


So as our desire to take more out of the Company (above £50,000 each) increases, the gap between the LLP and LTD benefits get closer?


 


Any other reasons for deciding between them? Both have liability caps, and need for accounts.

Expert:  bigduckontax replied 3 years ago.
Yes because on a personal level you are taxed at 40% whist the company never goes up from 20%.
Customer: replied 3 years ago.

Superb.


Really appreciate your responses.


 


Have a great weekend.

Expert:  bigduckontax replied 3 years ago.
Pleased to be of assistance.
bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 3 years ago.
Thank you for your support.

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