Personal limited company financial risks highlighted by Covid19

Government financial help in response to Covid19 was implemented quickly, is generous and will save jobs and businesses. It is right that the state stepped in at a time of national emergency.

Covid19 highlighted many financial risk areas for personal limited companies. Most of these also arise even in “normal” times. Although the risks are well known and common financial errors, it is worth repeating these now, for future risk management.

Some key risks are:

  1. Lack of personal savings for emergencies and company cash reserves for emergency cashflow
  2. Not fully understanding that the company is a separate legal entity to the owner (and that you are “self-employed” only in the loose sense of the term)
  3. Failing to send tax returns and pay taxes on time
  4. When saving tax and NIC by the use of low salary, dividends, company retained funds, alphabet shares or the ability to time profit extraction, not being honest about it (eg when demanding help* from the Government)
  5. Following your accountant’s advice on tax saving, but not on financial management
  6. If you would have defended your “dividends are dividends, not salary” to the death with HMRC, don’t immediate flip to equating it with earnings or self-employed profits, when that becomes more convenient
  7. If your company is paying dividends, do it properly (and check that you are doing it properly, before HMRC check)
  8. If you claim to be “paid in dividends” prepare for a battle with HMRC
  9. In reality, being a disguised employee of one large company
  10. Thinking salary must be a fixed monthly amount
  11. Thinking “every business owner does it that way” – they don’t
  12. Running a business, so that it is reliant on each month’s income to pay each month’s outgoings, with no safety net
  13. Seeking the cheapest advice, internet free advice or the lowest tax rate
  14. Lack of insurance and protection (life cover, critical illness and income protection, self-insurance via savings, pension contributions, shareholders’ agreement, a will and lasting power of attorney)
  15. Lack of “what if”, crisis planning and a business plan
  16. Not understanding that every time you do something to save tax (or NIC), it could open up a potential known (or unknown) future problem – especially where tax is driving the structure or plan, instead of the commercial and practical reasons

Several of these are not self-inflicted errors. Some employers attempt to save NIC and other employee costs, by forcing employees into freelance personal service companies. Some accountants push tax savings and “solutions” before financial guidance. Many IFAs charging structures are confusing and opaque.

But, running your own business is more fun, flexible and rewarding than being an employee. By not falling into the above traps, and barring pandemics, you also should have a sound financial future in running your limited company.

*I think there should be some Government help here – but it’s complex, as the underlying company income should form part of the calculation (due to the lack of transparent taxable profits, compared to a sole trader/partner). Honesty around the tax and NIC saved would also help formulate an argument for reasonable financial help.

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