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Should you set up a separate limited company for your new venture?

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Q: “I’ve come up with a new business idea. Should I use a separate limited company for this?”

A: You mention that you already have another business and that this is run through a limited company. There are a number of advantages and disadvantages to incorporating a second limited company for the purposes of running the second business.

Disadvantages

If both businesses are profitable, your overall tax liability may be increased by running two companies.

The rate at which companies start to pay the higher rates of corporation tax is accelerated where you have a number of companies under common control, even if they are not part of a formal group structure.

Assuming that the new business doesn’t immediately make profits – it may take a year for things to get off the ground – as the business grows, resulting in a small loss, you won’t be able to match these losses against the profit in your existing business.

Strictly speaking you may not be able to do this even if both businesses are within one company. However, in practice, where the activities are related, this benefit can be obtained by having both activities in one company

Running two limited companies usually means two sets of legal fees, accountancy fees, and other costs. Although these are unlikely to be huge, they all add up.

Similarly, having two separate limited companies means that you need to maintain two sets of books & records, two sets of bank accounts, and so on. This means a lot more administrative work.

Advantages

The main advantages of using separate companies are based on commercial factors. For example:

Separate companies can ring-fence potential risks or liabilities from existing business, in case it does not work out as you had hoped. This means that any problems in the new business should not damage or affect your existing business.

Where the activities of the two businesses are particularly different – for example, bespoke suit making and catering – it may just look too odd to have them both within one company and send a confused message to both sets of customers.

If you need investment in the new activity, you may want to keep this separate so that you are only giving away ownership of one business rather than both.

You will need to evaluate the above factors and determine what is most important overall. Part of this process will involve looking ahead a few years, to see how things might look further down the line – don’t just make the decision based on current circumstances.

Martin Dunne is a partner at Sayers Butterworth LLP. He previously worked in the entrepreneurial services division of Ernst & Young, and has over 15 years of experience working with fast-growing, entrepreneurial businesses. He provides practical and commercial advice to clients ranging from start-up stage to AIM-listers in a variety of sectors including retail, property, manufacturing, technology and media.

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