'It is vital to choose the correct [limited company] structure to provide the balance of stability and flexibility which best suits the owners'
Question: Bank loans
A few years ago I started a business . My bank gave me some worthwhile tips and loaned me a substantial amount of money. After years of loyal custom, the bank's manager was replaced. Since then my business has been reassessed.
It turns out that I was given too big a loan at the beginning and the bank has subsequently done everything in its power to get me out. Since my time as a customer, I have never been in debt or acquired any charges for late payment or going over my overdraft limit. The bank has cancelled my overdraft and I have been given 30 days to transfer my account.
Is there anything I can do?
Your problem is a common one, Banks frequently have changes of lending policy, sometimes directed by head office, sometimes by a change of personnel at the bank.
You say that you have never been in debt, but you do have some indebtedness to the bank in the form of your overdraft. If you have a written loan agreement with the bank, eg for repayment by monthly installments over 10 years, and if you have not breached any of the provisions in that agreement, you may be able to persuade the bank to take a softer line. However, nearly all overdraft facilities are repayable 'on demand': this is normal banking practice. If this is the case there may be little that you can do.
Much will depend upon the size of your overdraft, and whether you have given a personal guarantee or other security. If the bank has a guarantee or a charge on the premises, your negotiating position is weaker. Paradoxically, the more money you owe the bank and the weaker its security position, the more accommodating it may be. If you have not already done so, make an appointment to see your bank manager to discuss and try to find out whether there is any underlying problem which you can rectify.
Do not be confrontational! Your bottom line must be that you may need more time to make alternative arrangements, and if the bank believes that you can make other arrangements it will probably give you the necessary time. If your trading and payment record is good, you should have every chance of obtaining replacement bankers who are more sympathetic.
Question: Limited company
I am an architect and have recently established my own small practice, registering it as a limited company. I have received conflicting advice, and would be grateful if you could help.
It would appear that the limited company with only my earnings as income is treated in a very different way from other types of limited company. I travel from site to home (up to 800km a week) - can I claim petrol for this? And as I am vat-registered, can I reclaim the vat on this fuel?
How can I best take income from the company? Can I sell my existing equipment (privately owned) to the company, and if so will it be taxed? Can I purchase new equipment from the company asset balance, and write it off against profits?
The points you raise are very detailed and cannot be fully covered here, but do highlight some common misconceptions about the operation of small businesses as limited companies.
Firstly, it is worrying that you seem to have taken the limited company route without fully understanding the repercussions. It is vital to choose the correct structure, both to take advantage of tax regulations, and to provide the balance of stability and flexibility which best suits the owners.
A limited company with only the sole director's earnings as income is not treated differently just because it is small: a limited company is a separate legal entity with its own rights and responsibilities, and the director also has legal responsibilities in respect of the company.
Tax legislation for limited companies means that normal trading expenses can be deducted from profits - including running expenses of company-owned vehicles. However, if the company provides a car and/or fuel for the benefit of its director, the director will be taxed on this benefit.
You will be able to sell existing equipment to the company, although the tax inspector may insist on the price being fixed at market valuation. The company may also claim a capital allowance, representing the annual depreciation of equipment it owns as a deduction against trading profits.
The director/shareholder will be able to draw income in one of two ways - either as a salary and bonus, or through a dividend (providing there are sufficient profits). However, while dividends do not carry a national insurance charge, neither do they count as salary for pension purposes.
Lawyers For Your Business provides a free guide 'Structuring Your Business', a free half-hour session to business operators, and a list of participating solicitors in your area. For further information on both, phone 0171 405 9075.