Contractor sideline business – start new company?

Something we get asked quite a lot is what best to do when someone with an existing business wants to set up something a bit different on the side.  This may be a contractor wanting to develop their own apps/games, to team up with other people to form a bigger consultancy and take on bigger projects, or perhaps do something entirely unrelated to their main work.

Anyone who’s read my blogs will know my main focus is on keeping it simple.  If there are big tax savings/other benefits to be had, then sure, consider more complex options…but complex isn’t always (indeed very rarely is) better.

Key question is typically whether to run it all through their existing business, or to create a completely independent business for it.

Benefits of running it all under your existing company:

Less admin – you only need to keep one set of books.  You don’t need to worry about which company’s bank account to pay for things from.  You don’t need to worry about intercompany loans, or funding via director loan account.  Your personal tax stays easy as there’s just one company you draw salary/dividends from.
Less cost – directly related to the above, accountancy fees typically won’t change much if one company starts to do a few other things.  If you wanted a second company, fees would almost certainly increase, possibly close to doubling.
Joint costs – inevitably there’ll be some purchases which don’t relate to one specific business or the other, as you’ll use it on both.  Eg you buy a new computer, a lovely desk, or rent an office.  If it’s one company, no worries!  If you had two, you might need to apportion costs or charge a “rent” for the other company using the first company’s stuff.
Use of losses – if one company effectively has two trades, one profitable, the other loss making, the losses can be offset against the profits within the same year.  This basically means you get corporation tax relief for any losses the new business might incur in the early days, when set up costs dwarf income.  This would not apply if you had two separate companies, one profitable, one loss making (caveat – can potentially be achieved with a group structure…but see my second paragraph about keeping it simple).
Potentially lower CT rate – this won’t make a massive difference with tax rates as they stand, and would only impact a few anyway, BUT…if you have a highly profitable contracting business making (say) £200k annual profits, it’ll fit nicely in the small company rate, meaning 20% corporation tax.  If it takes on a second trade, regardless of whether the second trade makes a small loss reducing this to (say) £190k, or small profit increasing it to (say) £210k, you’ll still be below the £300k threshold above which you drift into the slightly higher marginal tax rate.  If on the other hand you had two independent companies, one making a profit of £200k, the other making either a loss or profit of £10k, then as you control two companies, the tax bands will be halved.  This means the £200k profit company will be paying marginal rates on profits above £150k.  Google “associated companies” if you want more info re this.

Benefits of setting up a new company:

Complete separation – if you feel it really is a completely different business, you may feel it would muddy the waters to have the figures merged.  Having separate books will make it crystal clear how well each business is doing.  Yes with just one company you can of course do a bit of management accounting to keep tabs on the profits of each business…but it’s harder.
Different owners? – not relevant if both companies will be “just you”, but often the second company will be some kind of joint venture with one or more other people.  Giving them shares in your main company is a dangerous thing to do, but if you set up a new one, it can have its own share split which doesn’t need to mirror your first company.
VAT? – depending upon what you’re doing in each business, sometimes it’ll make sense for one to be VAT registered, the other not.  Eg one business might be selling to VAT registered businesses, whilst the other sells to Joe Public (who can’t reclaim VAT).  If you have two separate companies with different businesses, you can validly have one registered for VAT, the other not.  Similarly you may benefit from both registering for VAT, but one being on the flat rate scheme, the other not.  Only thing to be careful of here is if they invoice each other, you might end up with one company charging VAT that the other can’t reclaim.
Completely different branding – before making this point, I should stress one company can have multiple trading names.  This is fine, but any invoices/websites/whatever would need to state somewhere “XYZ is a trading name of ABC Ltd”.  Sometimes you might not want this.  If you have two separate companies, they can have completely independent names
Selling a business – one Ltd Co can potentially sell off a “business” from it, whilst keeping the other business ongoing.  However, any potential buyer would typically prefer the clarity of one company with just that business in it.  Not every business will have “selling out”/”go for an IPO” as a plan for even years down the line, but some do.

Summary

So plenty of things to consider, and there is no “one size fits all” correct answer.  However, unless any of the benefits of two companies are significant and required from day one, our advice generally is to run it from your existing company until it is proved to be a viable business in its own right.  As at that point, you can create a separate company and spin it off.  Otherwise you can have a situation where someone sets up a new company for every idea that pops into their head, then gets swamped with filing deadlines and accountants fees for multiple different entities, few of which achieve anything!

Interest to hear other people’s thoughts on this, especially if you strongly disagree with any of the points above.

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