Close company

3 Key Takeaways

• Shareholder Restriction: Typically has five or fewer participators (shareholders or directors) who control the company.
• Tax Implications: Close companies face specific tax rules and regulations, particularly regarding dividends and loans to participators.
• Common Structure: This is a common structure for small businesses, family-run enterprises, and startups.

What is a Close Company?

A close company in the UK is defined by the Companies Act 2006 and further elaborated in tax legislation. The key characteristic is that it’s controlled by five or fewer participators, or by any number of participators who are also directors. Participators include shareholders, loan creditors with certain rights, and individuals who benefit from the company’s income or assets.

Importance of Understanding Close Company Status

• Tax Planning: Close companies have specific tax rules, including higher tax rates on investment income and restrictions on extracting profits as dividends. Understanding these rules is crucial for effective tax planning.
• Financial Reporting: Close companies may have different financial reporting requirements compared to public companies.
• Governance: The close relationship between shareholders and directors in close companies can influence decision-making and corporate governance practices.

How Close Company Status is Determined

The determination of whether a company is ‘close’ is based on the number and type of participators, as well as their relationship with the company. HMRC provides detailed guidance on this assessment, and it’s essential to consult with a tax professional or accountant to determine if your company meets the criteria.

Examples of Close Companies

• Family Businesses: A family-owned bakery with a few shareholders who are also family members.
• Startups: A tech startup with a small group of founders and early investors.
• Small Businesses: A local plumbing company with a single owner-director and a few minority shareholders.

Real World Implications of Being a Close Company

Being a close company can have significant financial implications. For instance, loans to participators are often subject to additional tax, and the distribution of profits as dividends may be restricted. It’s essential for close companies to understand these rules and plan their finances accordingly to avoid unexpected tax liabilities. While close company status may present some challenges, it also offers flexibility and control for the owners, making it a popular choice for many small and medium-sized enterprises.