New Business - subsidiary? or not?

[Snape]

Hi,

We currently have a successful small business, with some cash in the bank. Its a ltd company.

We are planning to use that cash (plus a small amount from directors) to set up a new company, in broadly the same field. So not an entirely different type of business.

Same directors for the current company and the new company.

Im thinking a subsidiary is possibly the way to go, in order to transfer that money across with the least hassle.

Am I correct?

If I did go subsidiary, with it still being a small group, would it lose audit exemption?

If we didnt go subsidiary, I think a separate LTD company will mean we cant move the cash from our current business as easily or without paying something on it.

Many thanks for any replies and advice.

 

[ClubMan]

This is the type of question that really needs independent professional business, other, tax, and accountancy advice. You should at the very least talk to your accountant, solicitor, and maybe even other specific professional advisors.

 

[Brendan Burgess]

You do need professional advice, but there is no harm in getting some general principles here to brief yourself before you sit down with your professional advisors.

There are pros and cons to both.

Having two separate companies has operational advantages.

1. If Company A becomes insolvent, subsidiary Company B is unaffected by it. For example, someone successfully sues Company A for a risk which is not insured.
2. If Company B becomes insolvent, the parent is not legally affected, but it would be very bad PR to have unpaid creditors while the parent continues to trade.
3. If you ever want to give employees a share of company A, you can do so without giving them a stake in Company B.
4. If you want to sell Company B , then you are selling it and can access the proceeds personally. If it's a subsidiary, the proceeds belong to Company A.
5. Having separate companies seems simpler in terms of audit and compliance and tax.

Against that, the benefits of having one as a subsidiary of the other are

1. You can set the losses in one against the profits in the other for tax purposes.
2. You can use the cash in the parent company to finance the subsidiary

Why are you planning two separate companies at all? Why not operate the second business through the first company and don't bother with subsidiaries?

If there is a good reason for a separate company, my gut would be to keep them totally separate.

If Company B is high risk, then maybe set it up as a subsidiary.

Brendan

 

[Snape]

This is the type of question that really needs independent professional business, other, tax, and accountancy advice. You should at the very least talk to your accountant, solicitor, and maybe even other specific professional advisors.

Thats what we will do, but I just wanted to arm myself with some info and ideas before sitting down with the accountant.

 

[Snape]

You do need professional advice, but there is no harm in getting some general principles here to brief yourself before you sit down with your professional advisors.

There are pros and cons to both.

Having two separate companies has operational advantages.

1. If Company A becomes insolvent, subsidiary Company B is unaffected by it. For example, someone successfully sues Company A for a risk which is not insured.
2. If Company B becomes insolvent, the parent is not legally affected, but it would be very bad PR to have unpaid creditors while the parent continues to trade.
3. If you ever want to give employees a share of company A, you can do so without giving them a stake in Company B.
4. If you want to sell Company B , then you are selling it and can access the proceeds personally. If it's a subsidiary, the proceeds belong to Company A.
5. Having separate companies seems simpler in terms of audit and compliance and tax.

Against that, the benefits of having one as a subsidiary of the other are

1. You can set the losses in one against the profits in the other for tax purposes.
2. You can use the cash in the parent company to finance the subsidiary

Why are you planning two separate companies at all? Why not operate the second business through the first company and don't bother with subsidiaries?

If there is a good reason for a separate company, my gut would be to keep them totally separate.

If Company B is high risk, then maybe set it up as a subsidiary.

Brendan

Many thanks Brendan, we did think about just registering an rbn and do a "Trading as" for the new company. But did not want it all too mixed up! One business, the current one, is a service, the new one is a product(s).
I'll add that back onto the list for the accountant.

The main reason to not investigate the separate Ltd company was the need to access the money in the first company. Your point 2, in the subsidiary benefits.

 

[Brendan Burgess]

Why do you have cash accumulating in a service company?

You could take it out and lend it to the new company. That would be a lot simpler although you would be taking the tax hit up front instead of deferring it.

As pointed out here often, if you have cash in a company, you should have a written tax plan from your tax advisor explaining why. You should not just accumulate by accident through not distributing the profits every year.

Brendan

 

[T McGibney]

Against that, the benefits of having one as a subsidiary of the other are

1. You can set the losses in one against the profits in the other for tax purposes.
2. You can use the cash in the parent company to finance the subsidiary

Just to note Brendan, each of these benefits apply only in specific circumstances and all hell tends to break loose particularly when parent and subsidiary companies use each others funds without it being technically legal for them to do so.

The OP really needs here to focus on their consultation with their accountant or tax advisor.

 

[Snape]

Just to note Brendan, each of these benefits apply only in specific circumstances and all hell tends to break loose particularly when parent and subsidiary companies use each others funds without it being technically legal for them to do so.

The OP really needs here to focus on their consultation with their accountant or tax advisor.

Many thanks. It will mainly be just a startup loan, to be paid back.

More ammo for the meeting with the accountant!

 

[T McGibney]

Many thanks. It will mainly be just a startup loan, to be paid back.

More ammo for the meeting with the accountant!

To be honest, in relation to something like this, I wouldn't be posting online even anonymised details of what you're doing. The minefields we negotiate in implementing changes of this nature are sufficiently perilous as it is, and it's a very small country.

 

[Zenith63]

One business, the current one, is a service, the new one is a product(s).

Doing both is very difficult at the best of times, coming from a services mindset it can be hard to spend money on product development without the expectation of immediate return and if things get tough/busy in the services business, working on the product will tend to suffer. You might also want to raise funding to develop the product, this can be much easier without the baggage of being a services company! You should also consider whether you might want to sell the product down the road if it becomes successful while potentially retaining the services business if it is paying for your lifestyle or would only survive with you involved.

I know nothing about the tax side of things, but having been involved in setting up both and trying to create products within services companies, I would aim to separate them as soon as it looks like you've got a viable product.