In the UK, a close company is defined as a limited company with five or fewer participants, or a limited company where all the participants are also directors. For most small limited companies, ‘participators’ will just mean shareholders. However, if the company has issued debt finance called debentures, then the holders of the debentures will also be considered participants.
One of the unique characteristics of a closed company is that its stock is not available for public sale or traded on a national securities exchange. This means that the general public cannot readily invest in them, and the shares are often held by the owners or managers of the business and sometimes even their families.
Close companies have more flexibility compared to publicly traded companies as they are free from most reporting requirements and shareholder pressure. This added level of secrecy can prevent competitors from learning about a company’s plans and give close corporations greater flexibility in how they operate.
However, with fewer shareholders involved and shares not publicly traded, liquidity can be an issue for close corporations. When a shareholder dies or has a desire to liquidate their position, the business or remaining shareholders will buy back the shares.
There are closed corporations all over the world. They are involved in a wide variety of business pursuits, from retail and manufacturing to business services and financial services. Some examples of well-known closed corporations include:
If a close company makes a loan to a participant that isn’t repaid within nine months and one day of the company’s year-end, the company will have extra tax to pay. The tax effects of dissolving a business depend largely on the type of organisation you are closing.
A closed company may elect to pay dividends to its shareholders. But, because issuing dividends may result in double taxation, most closely held corporations opt to not pay dividends.
Seeking professional tax planning advice can help close companies minimise their tax liability when operating and especially when dissolving the business.
There are several advantages to the close company structure that make it appealing for many small and medium enterprises (SMEs) in the UK:
Close companies in the UK have some specific tax considerations:
Professional tax planning is advisable for close companies to fully utilise allowances and minimise their tax liability.
Close companies have fewer reporting requirements than public limited companies in the UK. However, they still need to prepare and file certain accounts and reports:
Maintaining accurate records and seeking professional accounting assistance can help close company directors fulfil their reporting duties and avoid penalties.
There are a few ways that a new business can adopt the closed company structure in the UK:
The company name must include ‘limited’ or ‘ltd’ and articles of association are required on the formation of a close company. Company formation agents can assist with the registration process for a fee.
It is also possible to convert an existing close company into a PLC by re-registering. However, this requires adhering to the greater reporting and regulatory requirements of a public company.
Close companies have some advantages but there are also potential disadvantages to consider:
Seeking professional legal and financial advice can help establish the right company structure and maximise the benefits.
Many small businesses begin as sole traders or partnerships. At some stage, the owner(s) may consider converting into a close company to enjoy the benefits like limited liability. Here is an overview of the conversion process:
Overall, converting an existing business into a closed company requires careful planning but can put the business on a growth footing and provide long-term benefits.
Absolutely – it’s quite straightforward to convert your unincorporated sole trader business into a closed private limited company. This gives your business a separate legal status and also limits your liability. Just be sure to get professional advice on the process.
Some of the key disadvantages are having limited options for raising investment capital externally, potentially attracting inheritance tax if shares are passed on, and taking on extensive financial reporting duties as directors. Minority shareholders also don’t have much power in closed companies.
A private limited company is simply a company that can’t sell shares to the public – it covers both close companies and other small private companies. Close companies specifically have a small number of shareholders, typically less than 50, who are often directors or family of the directors.
Yes, there’s no minimum age for being a shareholder in a close company. But children can’t be appointed as directors, so you would need to make arrangements for adults to represent the child’s interests until they turn 18.
Close companies are limited by shares, so the company is owned by shareholders rather than the directors themselves. But close companies are restricted to only issuing ordinary shares, whereas public limited companies can also issue preference shares.
One of the flexible features of close companies is that they can be run by a single director. This compares to public limited companies which are required to have at least two directors. It’s often wise to have more than one in case of emergencies though.
To be classified as a close company in the UK, the company needs to have no more than 50 shareholders. Going above this number would mean becoming a public limited company and complying with more stringent regulations. Most close companies have far fewer than 50 shareholders.
Close companies have to comply with filing annual accounts, company tax returns and confirmation statements each year. They also need to maintain official registers of shareholders and directors. Small close companies can qualify for audit exemptions.
Yes, your shares in a close company can be passed on to your children or other beneficiaries through your will after you pass away. They become the new shareholders, but can’t be directors until turning 18. Some inheritance tax planning may be helpful though.
In summary, a close company is a type of business entity characterised by a small number of shareholders who are typically involved in managing the business.
Close companies offer benefits like operational flexibility, confidentiality, and tax efficiency compared to public companies. However, they also come with downsides such as limited financing options, liquidity constraints, and extensive legal responsibilities for directors. Careful planning and advice are required to successfully run a close company in the UK.
The close company structure can allow founders to maintain control and grow their business steadily if utilised properly. With professional guidance, close companies provide an attractive model for many small and medium enterprises.
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