If you’re thinking of setting up your own business, or you’re just getting ready to complete your annual accounts for the first time, you might have come across the terms “open company” and “close company”.
So what’s the difference between an open company and a close company? What sort of company are you running, and why does it matter?
What is a Close Company?
A close company is any limited company that’s owned and controlled by five or fewer individual “participators”. So, what’s a participator? It’s anyone that has certain types of financial interest in the company, including voting power or share capital. A participator would also have rights to capital if the company were wound up.
Going by this definition, a participator might be a shareholder, a director, or a loan creditor.
Another definition of a close company is a limited company in which all the “participators” also happen to be directors.
Examples of a Close Company
Let’s say you set up a limited company. You might employ some staff, but you appoint yourself as the sole director and shareholder. In this case, your limited company would be a close company, as it has five or fewer participators.
Or perhaps you’re setting up a limited company with four of your friends. You want everyone to have an equal say in your business’s future, so all five of you become directors. As all of your company’s participators are also directors, then your company is a close company.
What is an Open Company?
According to the government’s company taxation manual, the term “open company” simply refers to any company that’s not a close company. The majority of small companies are close companies. Just count your participators, and count how many of them are also directors. If you have five or fewer participators, or if all of your participators are also directors, then you have a close company.
Loan Rules for Close Companies
If your close company makes any loans to your participators or associates, you’ll have to self-assess your tax liabilities. Depending on your circumstances, you may have to make payments to HMRC that are equivalent to 25% of the outstanding loan advance you made during the accounting period.
Also, if your close company incurs an expense when providing benefits or services to a participator who is not a director, or who is not an employee earning £8,500 or more, then HMRC may treat this as a distribution rather than as an allowable expense.
Corporation Tax Rules for Close Companies
Finally, when it comes to corporation tax, most close companies can use the small business or starting rates. But if your close company is a “close investment holding company”, then you’ll have to pay corporation tax at the full rate, no matter what your profit levels are. You can read the government’s guide to what counts as a close investment holding company here.
More Help For Small Companies
HMRC’s rules for businesses are complicated. Some might say they’re a lot more complicated than they need to be. If you’re new to the world of business or accounting, we have numerous guides on our site that you might find useful:
- A guide to registering your business: Sole Trader or Limited Company?
- How much does it cost to set up a limited company?
- Changing from a sole trader to a limited company.
- How long should you keep tax records?
- How to pay underpaid tax.
- When do you pay corporation tax?
Also, if you’re thinking about whether your limited company is a close company, maybe you’re considering, for the first time, just what role your directors play in your business. Their decisions can make or break your business. And if they make a mistake while performing their obligations and duties as directors, it can cost you dearly.
Our directors and officers insurance can cover many claims concerning your key decision-makers. We’ll tailor our cover to suit your specific business needs. There are no hidden costs, and you’ll only pay for the cover you need. Head here to get a free quote in minutes.
If you have any questions or would like to discuss your options please contact our Tapoly team at email@example.com, call our help line on +44(0)2078460108 or try our chat on our website.