Investing Limited Company Retained Profits

If you run a UK limited company, then you might be interested in investing some or all of the annual profits in the stock market. Here’s what I’ve found out when I considered retaining the profits in my own company, instead of paying the money as a dividend to the shareholders in that company.

Why Invest Company Profits?

Many people (myself included) have jobs as well as owning a limited company. It may be more tax efficient to retain the profits in a business rather than pay them out as dividends in a particular tax year. So you can build up the profits in the good years, and then draw an income in the lean years. Or build up the profits and then draw a salary while you travel around the world on your yatch!

Of course if you’re retaining company profits then due to inflation the money could lose its value over time. Most company bank accounts only pay a modest amount of interest. So if you want to retain the purchasing power of the money, it makes sense to invest it in other assets.

A typical investment account will allow a company to purchase stocks, bonds, commercial property (unit trusts or REITS), foreign currency and Exchange Traded Funds (ETF’s).

How to Open a Company Share Dealing Account

If you want to invest in assets other than cash, then usually the best thing to do is to open a trading account.

Make sure you open one in the name of your company, and of course you shouldn’t use your personal ISA or SIPP!

Two companies I’ve found who offer trading accounts for limited companies are Selftrade and Hargreaves Lansdown.

Selftrade look good, but when I looked there was an annual fee for the trading account. It might prove worthwhile for larger companies, but for my small company the cost was prohibitive.

I rate Hargreaves Lansdown quite highly, and I have a personal ISA and SIPP with them. It’s convenient to open a trading account for a limited company. You can then operate it online. Dealing charges are quite high, but it’s a better option for investing in unit trusts.

Problems With Investing Company Profits

My own limited company has only one shareholder – me. So if my financial decisions turn out to be bad and I lose all the retained profits, then I am the only person who is going to complain!

So it’s worth bearing in mind that if your company has two or more shareholders then you should make sure that the majority of the shareholders are happy to see company profits invested.

Also it’s worth bearing in mind that most companies will have to have some sort of meeting before profits are distributed in the form of dividends or other payments. So I guess that for peace of mind it’s best to get approval from other shareholders before you go and invest company profits in the stock market.

There is one other gotcha with investing your company’s profits. I’ve heard that if the majority of your company’s profits in future years are due to dividends and profits from investments, then your company could be classed as an investment company! Investment companies have a lot of their own particular rules and regulations, especially as regarding accounting standards and auditing. So be careful to think through the implications of investing company profits. If you have recurring income from product sales or services, then you should be OK (unless your investment portfolio is substantial). But if you’re using your limited company to provide one off services (e.g. as a computer contractor) then it’s quite possible that if you didn’t invoice for any services in a particular year then your investment income could easily exceed your income from providing services.

So while it is possible to invest your limited company profits, think carefully before you do so.

By the way, I’m not a financial advisor, and I’m not YOUR financial advisor! Before investing your money, or your limited company’s money, be sure to seek professional advice!

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