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Investing in shares through a limited company

Investing in shares through a limited company
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There are many business owners out there that are completely unaware of the fact that they can invest in shares through their limited company. Mostly because of lack of information, very few business owners know how to invest in shares through their limited company effectively.

While investing in shares may seem intimidating at first, it can be a strategic way to use your business capital and broaden your investment portfolio.

As small business advocates, Real Business aims to spread accurate and useful information for small businesses. In this article, we’ll be looking at the advantages of investing in shares through a limited company, as well as some of the steps involved in making your very first investment!

Am I legally able to invest in shares through my limited company?

Yes, a limited company is a separate legal entity and is therefore entitled to purchase stock, shares and even property.

Why do business owners invest in shares through their limited companies?

Investing can be a time consuming, admin-heavy, and sometimes even risky process. So why would business owners be interested in investing in shares through their limited companies?

Higher returns

The fact of the matter is that it is a great way to receive higher cash returns, with investments often yielding a lot more profit than you could expect from a bank.

Less tax implications

Business owners are often not sure of what to do with their business’s cash reserves, as withdrawing them into their personal bank accounts could result in large taxation in the form of income tax. This is why it is often better to keep cash reserves in the form of shares and within the company.

Interest in the stock market

Some business owners are also simply interested in learning more about the stock market, and investing in shares through their limited company provides a great opportunity to do just that.

Why shares?

As a limited company, you have many different investment opportunities available to you, so why does this article focus specifically on shares? As a company grows, its shares will increase in value over time, so shares can be a great way to generate profits.

The number of shares issued will differ from company to company and can change over time, but the minimum share is always 1, which the company owner holds.

Encourage other companies to invest in your business

By investing in the shares of other companies, business owners may encourage these companies to invest in their business in turn, or at least put a bit of a spotlight on their business which is important in succeeding in the world of business.

Dividends pay out

When it comes to shares, you typically make a profit if the shares rise in value and make a loss if the shares decrease in value. However, there is also usually the option to get paid out in dividends. These dividends can be taken out as an income, or they can be reinvested.

Buy and sell shares to generate a profit

Shares can make effective short term investments as well as long term investments, it all depends on the company that you choose to invest in. Trading shares gives you the opportunity to buy and sell shares and turn over a profit.

A simple form of investing

Shares are also a relatively easy and simple form of investing, with many easy-to-use platforms, which make them ideal for first-time investors.

Advantages of investing in shares through a limited company

Of course, no business owner would be interested in investing in shares through their limited company if there weren’t some enticing advantages on offer. These advantages include:

Protection

When you register as a limited company with the HMRC, you can open up a business account, which gives you access to limited liability insurance. This insurance ensures that your personal assets and business assets remain separate and that your personal assets are protected should your business go into debt. This is the major difference between a limited company and a sole trader, as when you are a sole trader, your business and personal assets are combined.

This limited liability insurance acts as a great form of protection when you are investing in shares, as even if you make a loss, your personal assets will not be at risk.

Reputation

By investing in shares through your limited company, you open your business to a wide network of other investors and shareholders who may want to buy shares in your business. On top of this, by making wise investment choices, you add credibility to your business’s reputation, which will, in turn, bring you more popularity and sales.

Investment transactions can easily be tracked through your business account. Therefore, this is a great way to create a sense of reliability when dealing with hedge fund managers and the likes.

Having access to funds

Many business owners prefer to keep their business’s capital and funds within the business as it is easier and cheaper to access them. If you need finance along the way for your investments, it will be far easier to gain this through a business entity rather than through a personal capacity.

Risks and limitations involved in investing in shares through a limited company

Any type of investing comes with certain risks and limitations, and as a business owner, you should be aware of the following:

Investments are not seen as trading expenses

In the world of business (and tax), investments are not seen as trading expenses, which means that they are actually seen as an asset. Resultantly, you won’t benefit from corporation tax relief for your investment assets.

Taxed when you sell

If and when you happen to sell your investments, you will be taxed according to corporation tax gains rates.

Investment should not be your main trade

Be careful of opening up a limited company simply to trade and invest through. Your limited company should be a company in and of itself, and investing should just be a side stream of income. If investing becomes your main point of profit, it may affect your accounting and taxes.

When you make a loss

When you make a loss, it should be noted that it cannot be set against your eCommerce revenue. The only place that it can be set against is gains from your other investment activity, and this can cause some issues when it comes to accounting.

Extra admin

Keep in mind that when you start investing through your limited company, you’ll be met with a lot of extra admin that you’ll need to keep on track with. Ensure that your accountant understands how to log investments and how to keep track of investment profits and losses etc., as you will need to keep precise and up to date records.

The first steps in making an investment through your limited company

  1. The first thing that you’ll want to do (especially if you don’t have a broad knowledge surrounding investing) is to do some research on the type of investment that you’re interested in making. Ensure that you are aware of all of the opportunities that you have available to you. When investing in shares, you should always invest in companies that you see true potential and growth in and have proved that they are a reputable company through having a clean track record.
  2. Speak to a financial advisor to help you narrow down your options and provide you with sound professional advice. They will also ascertain whether you have the necessary funds to make your desired investment.
  3. Decide if you will make this investment through your limited company or set up an entirely new account and loan the account the funds needed for the investment from your company.
  4. Present your investment proposal in full detail to your business partners and shareholders should you have any, as they will need to be a part of the approval process.
  5. Prepare administrative executives and accountants for the excess admin that will be involved in the investment so that they understand exactly what will be required from their end when keeping track of your investment.
  6. Choose a trustworthy investment platform and get investing!
  7. If you happen to get really busy when it comes to buying and trading shares, you may want to hire someone who takes care of this aspect of your business and makes smart financial moves on your behalf. It’s advisable to always get them to run final decisions past you.

What are some other investment options that I can consider

As an owner of a limited company, you have a few investment opportunities available to you, including:

Invest through a separate company

A popular option for many business owners is to set up a separate limited company and make investments through strategic, intercompany loans. This helps minimise your trading costs and provides you with more investment opportunities. However, this can be a risky move in some instances, and it’s advisable to speak to a financial professional about this decision.

Invest in your pension

As a business owner, investing in your pension is always an advisable decision. You’ll receive corporation tax relief on this investment, and you’ll start building towards an amount that you can live off when you decide to retire. There aren’t any risks involved in this investment, and it is something that all business owners should definitely consider.

Re-invest in your company

If you find that your business has disposable cash and is turning over profits, you may want to consider reinvesting into your company. This could mean purchasing new equipment, upgrading your premises or upskilling your staff.

Property

Property is always considered a financially sound investment so long as you make a wise choice, of course. For example, buying your business property can save you when it comes to renting. Even buying an external property in which you plan to rent out or resell can be a wise investment and can indeed be purchased through your limited company.

Why invest in shares through a limited company rather than through a personal capacity?

Why would a business owner want to invest in shares through their business instead of through a personal capacity? On top of the advantages that we have already listed, investing through a business is simply a far easier process than investing through your personal finances. Investing almost favours those who invest through a business. If you are a sole trader, you may want to look at making the move over to a limited company if you are serious about investing. To change over is a relatively simple process and comes with many additional advantages that you may be interested in.

Tax considerations

One of the things that you need to take into account when it comes to investing through your limited company is taxation. All investment income will be taxed at a rate of 25%, but this rate will increase to 40% if this investment profit stays in your business account for more than 18 months. You have the option to withdraw your investment profits into your personal bank account, but the tax amount will go from 25% to 52%, causing you to lose a large chunk of your investment profits.

It should also be noted that when and if you sell your investment, the profit of this sale will be subject to Capital Gains Tax, which affects many different areas of limited companies.

What if I have shareholders in my company?

If your limited company has shareholders, they will need to approve the shares that you are investing in. Experienced shareholders may be able to offer valuable advice when it comes to investing, so it is definitely worth listening to what they have to say.

Remember that investing should not be taken lightly. While there are incredible benefits to be had, there are also risks involved, and there may be other people’s money at stake. So, if you feel unsure or uncertain about making your first investment through your limited company, take some more time to research things and employ the help of a financial advisor if need be.

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