Quite a few people have common perceptions of limited companies and the consequences of trading through one. We thought it useful to summarise some of the more common ones, which are actually myths, which we hear mentioned when explaining about how a company operates.
Directors have to be shareholders
In many small and family sized businesses it is often the case that directors are also shareholders, but there are no legal requirements for a director to also be a shareholder in the company they work for.
Shareholders have to be directors
Similarly, shareholders do not have to play any part on the running of a company, director or otherwise. The concept is exactly the same for small companies as it is for large quoted companies.
Operating through a limited company can save you tax
This tends to be more relevant than most myths, but it’s not a given. The level of profits is a factor. Certainly, if the company makes losses, there are less options for using the loss than if the business had operated as, say, a sole trader or a partnership. Also, care has to be taken as to the way that money is extracted by the directors; if it is simply taken as a loan, there are tax consequences which can be difficult to unravel.
The money in the bank account belongs to the director/shareholder
Wrong! A limited company is a separate legal entity in its own right. It can sue and be sued. Assuming that the company has opened a bank account in its own name, which it should do, then any money in the bank account that is surplus to any money introduced by the directors/shareholders belongs to the company. In many small companies, the shareholder and director may be the same person, but that does not mean that they have an automatic call on funds. There are legitimate ways to get the money out of the company, such as salary and dividends, but they must be documented and followed.
The message from this article is clear; myths exist! You should always get professional advice when operating through a company.
Does anyone else have any other examples of myths?