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articles > Managing your property with a Private Limited Company
Article > Managing your Property with a Private Limited Company


Article kindly provided by Graham Phelps


Many property companies, apart from very small concerns, are increasing becoming limited liability ('limited' for short') companies. This has several implications so far as property development is concerned. Firstly, a limited company has a legal identity of its own, ie. it is a 'person' in its own right. It can own property in its own name. It can sue or be sued. It has a tax liability and similarly may benefit from certain tax advantages.

Companies can be formed through an accountant or a company formation agent. It's usual, with this type of company, to form it as a so-called '£100 company' issuing 100 shares to the owners or shareholders worth £1 each. The importance of this share capital structure is that, in the event of any loss or bankruptcy, the shareholders will only be liable for £100. Thus, forming a limited liability company is a very good way of protecting yourself from financial ruin should a project go badly wrong.

 

All limited companies must have at least one director. Directors do not have to be shareholders, although they usually are. The directors form a board to run the company and can act as they see fit, although shareholders can remove them at the AGM or other occasions if they so wish. He or she who owns the majority of the shares effectively controls a limited company.

A limited company is a very good structure for syndicates. This offers liability against losses to the shareholders. It also means that shareholders can benefit from an equity stake in the company, yet at the same time delegate day-to-day running to the director or directors.

 

These are some of the additional benefits of setting up a limited liability company, so far as property development is concerned :

  • Loans, overdrafts and mortgages can be arranged in the company name, although named directors might need to be personal guarantors.
  • Capital can be raised by selling shares. For example, if initial results are good you may be able to sell your £1 shares for several hundred pounds each. (Note you cannot openly advertise shares on the market, for example in your syndicate advertisements, unless your company is formed as a public limited company or PLC, so it has to be done by word-of-mouth.)
  • The founder can keep overall control of the company although he/she may only have injected a proportion of the capital.
  • It is possible to recapitalise the company by issuing new shares. For example, to bring in new investors and raise capital for bigger and better projects.

There are, however, a number of disadvantages of setting up a company in property which must be considered :

  • The requirements to prepare annual accounts and file them with the Registrar of Companies create extra expense.
  • A company often has limited credibility with lenders, since its liability to repay debts is limited.
  • A company often has limited credibility with suppliers, until it establishes a credit history.
  • Your company will be liable for Corporation Tax (CT) on its profits. (Although this can be an advantage if you are a higher rate taxpayer.)

Always talk to your accountant or trusted advisor before making this decision.

Please contact me for any questions or comments

Graham Phelps

 

 
   
 


 

 

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