Investing Through A Limited Company

The ins and outs of investing in shares through your limited company.

Updated: May 20, 2024
Matt Crabtree

Written By

Matt Crabtree

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Looking for ways to diversify your business portfolio and boost your profits? Investing in shares through your limited company might be just the thing you need! By investing in established companies and start-ups, you could potentially see a solid return on your investment

But before you jump in, it's essential to understand the tax implications, risks, and strategies involved. Don't worry though – in this article, we've got you covered!

We'll explore the ins and outs of investing in shares through your limited company, help you choose the right types of shares to invest in, and provide tips on developing a solid investment strategy.

Whether your investing skills could give Warren Buffett a run for his money or you're just getting started and want to learn about basic financial instruments, we've got everything you need to make informed decisions and maximise your returns.

Introduction

Let's take a look at some of the advantages of investing in shares through your limited company.

Tax Benefits

When your company invests in shares, any gains you make will be taxed at the corporation tax rate, which is lower than the higher rate of income tax. If you decide to sell your shares, any profits will be subject to capital gains tax, which is currently set at 20%.

Diversification

If you spread your purchases across a range of different shares, you can reduce your exposure to risk and help protect your company against any negative market conditions that may arise.

This can be particularly useful if your business relies heavily on a single product or service, as it can help to offset any potential losses.

Higher Returns

While investing in shares comes with a higher level of risk, it can also potentially offer a higher return on investment than other asset classes such as bonds or property.

Ensure you're investing in companies with strong fundamentals and a proven track record of success so you can benefit from their growth and success over time.

Why Now Might Be Prime Time to Consider Investing in Shares

Now, I know what you're thinking – “But what about the current economic climate?” It's true that there's been a lot of volatility in the stock market since the COVID-19 pandemic, and some industries have been hit harder than others.

However, there are still opportunities for those who are willing to do their research and take a long-term view.

As the economy continues to recover, there are likely to be sectors and companies that will outperform the broader market.

Of course, it's important to work with a trusted financial advisor who can help guide you through the process and ensure that you're making informed decisions based on your business' unique financial situation.

Types of Shares to Consider

Investing in shares can be a smart move if you're looking for a way to grow your company's wealth, but with so many options, it can be tough to know which ones are right for your business.

Let's take a look at the different types of shares, their pros and cons, and how to evaluate potential companies to invest in.

The Different Types of Shares Available to Invest in

There are two main types of shares that you can invest in: ordinary shares and preference shares. An ordinary share is the most common type of share and gives the holder a stake in the company's ownership.

Preference shares, on the other hand, typically give the holder a fixed dividend payment but no voting rights.

Within these two broad categories, there are many different variations of shares available, including:

Cumulative Preference Shares

Cumulative preference shares are a type of investment that ensures a fixed rate of return to its shareholders.

It's like a security blanket for investors since the dividends paid to them accumulate over time, and they get paid out before any dividends are paid to ordinary shareholders.

This means that shareholders of cumulative preference shares have a higher priority in receiving dividends, which makes it an attractive option for investors who want a steady source of income.

Redeemable Preference Shares

These can be bought back by the company at some point in the future for a predetermined price. They're usually issued for a specific period, and once that period is over, the original separate company can trigger their buy back clause.

This type of share gives the company more flexibility, as it can reduce its outstanding capital if needed. It also gives investors more security, as they know that they can sell their shares back to the company at a fixed price if they need to liquidate their investments.

Convertible Preference Shares

Convertible preference shares are a hybrid security that gives investors the option to exchange their shares for ordinary shares in the future. This means that you have the flexibility to switch from a fixed income security to an equity security at a later date if you desire.

These shares are often used to attract investors who are looking for a higher return on their investment, but are understandably hesitant to invest in equity shares due to the risk involved. It also benefits the company, as it can raise capital without diluting its ownership or control.

Overall, convertible preference shares provide a win-win situation for both the company and its investors.

The Pros & Cons of Each Type of Share

Remember, the type of share that's best for your separate legal entity will always depend on your investment goals and risk tolerance as a company. Having said that, here are some of the pros and cons of each type of share:

Ordinary Shares

Pros

✔️ Voting rights, allowing you to influence the direction of the company

✔️ Potentially high returns on investment

✔️ Can appreciate in value over time

Cons

❌️ Potentially volatile and risky

❌️ No guaranteed dividend payments

Preference Shares

Pros

✔️ Fixed dividend payments, providing a stable income stream

✔️ Lower risk compared to ordinary shares

✔️ Can be customised to suit the needs of the investor

Cons

❌️ No voting rights

❌️ Limited potential for capital appreciation

How to Evaluate Potential Shares & Companies to Invest in

When considering investing in shares, it's essential to conduct thorough research and analysis to make well-informed investment decisions.

Several factors must be considered while making the all important decision.

Overarching Strategy

One key consideration for investing through a limited company is to ensure that the investment aligns with your business goals and strategy.

For example, if you invest money in companies that are in the same industry or complementary to your business, you can potentially gain a better understanding of the field and create networking opportunities.

How is Their Financial Health?

It is paramount to look at the company's financial statements to assess its profitability, revenue growth, and debt levels.

Make sure before you pull the trigger that the company is not overleveraged and has sufficient cash flow to pay dividends, especially if you are considering investing in preference shares as previously discussed.

Management Team

A strong and experienced leadership team can drive the company's success and create value for shareholders. Look for management teams that have a proven track record of making sound business decisions, executing strategies, and delivering strong financial results.

Industry Trends & Market Dynamics

Another factor to consider is the overall market conditions and trends in the industry the company operates in.

While it's vital to evaluate the company's individual financial performance, you mustn't forget to assess the industry's growth potential, competitive dynamics, and potential regulatory changes that may impact the company's performance.

Industry Landscape

Lastly, assess the competitive landscape of your investment candidates' industry. Look at the company's position within the sector, its competitive advantages, and its ability to compete with other companies in the market.

Evaluating any given company's competitors can generally help you gain a better understanding of the industry and potential risks.

How to Get Started

Now let's talk about how to actually go about buying shares.

  • 1. Research online brokers to find one that fits your needs. Look for a broker that offers the investment options and tools that you need, as well as competitive pricing and reliable customer service. You may also want to read reviews and ask for recommendations from other business owners or investors.
  • 2. Visit the website of the online broker you've chosen and click on the “Open Account” or “Sign Up” button. This will take you to the registration form that you need to fill out.
  • 3. Fill out the registration form with your company's information. You'll also likely need to provide your company name, address, email address, and phone number. This includes additional details, such as your company's registration number or VAT number.
  • 4. Ensure you double-check your information before submitting the form, as any errors could cause delays or problems with your account set-up!
  • 5. Choose the type of account you want to open. As a limited company, you'll likely want to select a corporate account. Depending on the broker, you may have different options for corporate accounts, such as a limited liability company (LLC) or a partnership account.
  • 6. Take some time to review the different options and choose the one that best fits your needs.
  • 7. Before you can open an account, you'll need to agree to the broker's terms and conditions, which may include details such as commission rates, account minimums, and other important information. Be sure to read through the terms and conditions carefully to understand what you're agreeing to.
  • 8. After this, you'll need to fund your account so you can start investing. You can typically transfer funds electronically by linking your company's bank account to your brokerage account.
  • 9. The broker may also offer other funding options, such as wire transfers or credit card payments.

Once you've set up your account and funded it, you can finally start browsing the investment options available through your broker!

Investment Management

How to Effectively Manage Your Limited Company's Investments

Profit Allocation

One of the first things to consider when investing through your limited company is how much of your company's profits you want to allocate towards investments. This will depend on your company's financial goals and risk tolerance as well as your investment horizon and diversification goals.

It's important to remember that investing is a long-term game, so you want to create a strategy that can hold its own through market fluctuations, etc.

IPS

Once you have a clear investment strategy in mind, it's a good idea to create an investment policy statement (IPS). An IPS is a written document that outlines your investment strategy and provides guidelines for your trading decisions.

These are typically great tools to help you stay on track and make better informed decisions when using company money.

When writing your IPS, it should include your investment goals, risk tolerance, and criteria for selecting and monitoring investments.

Diversification

Another crucial aspect of corporate investing is ensuring you have a well-diversified portfolio for your business account. As you're surely aware at this point, diversification is necessary if you want to reduce the risk of losses and maximise investment gains.

You should most likely consider investing in multiple types of security including stocks, bonds, and mutual funds. This way, if one sector of the market experiences a downturn, you won't be too heavily impacted.

Tax Implications

Tax Considerations When Investing Through Your Limited Company

First and foremost, you'll need to ensure your business has paid corporation tax on any investment income.

For the 2022/23 tax year, the corporation tax rate was 19%, but increased to 25% for profits over £250,000 from April 2023. Despite this, there are still ways you can reduce the amount you have to pay tax on corporate investments, such as reinvesting profits back into the business or claiming certain tax deductions.

Becoming More Tax Efficient

One helpful means of lowering your tax bill is to invest in shares that qualify for tax incentives like the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).

These schemes are massive if you're looking to receive corporation tax relief, so it's a smart idea to choose companies like these if you want to best maximise your profits. While they're not corporate tax free, it all helps for improving your bottom line.

Another approach is to be smart about managing your dividend payments. By keeping your dividends below the threshold for higher-rate taxpayers, you can help reduce the amount of tax your company has to pay.

Reinvesting these dividends back into your business instead of taking them as income is another effective method.

Moreover, keeping accurate records of all your investment transactions is also vital for checking you're paying the right amount of tax and for avoiding any penalties. Doing so can also help you identify tax-saving opportunities or strategies that can help minimise your tax liability.

Moving onto market conditions, timing the sale of your shares strategically is another massive way you can reduce your capital gains tax liability. For example, you can use your annual capital gains tax allowance to offset any gains you make from selling shares, or you can defer selling shares until the following tax year to spread your gains over two tax years.

And finally, seeking professional advice from a tax specialist or accountant can be a huge help in identifying additional tax-saving opportunities that are specific to your situation.

The Role of a Professional Investment Manager & When to Consider Working with One

While it's possible to manage your investments on your own, there are some key benefits to working with an investment manager that you should consider.

Firstly, they can provide valuable insights into the market. Investment managers spend their days analysing market trends and identifying investment opportunities, so they have a wealth of knowledge that can help you make informed investment decisions.

They can also help you to manage your risks, which is particularly important if you're investing a significant amount of your business' money.

Additionally, if you are struggling to create an investment strategy that aligns with your company's goals, you can work with an investment manager to think of one together! This is especially useful if you have complex investment needs or limited time to devote to managing your investments.

Of course, working with an investment manager does still come at a cost. All of them typically charge a fee for their services, which can obviously eat into your investment returns.

However, if you have a significant amount of assets to manage, the cost of working with an investment manager may be worth it.

So, when should you consider working with an investment manager? If you have a significant amount of assets to manage, complex investment needs, or limited time to devote to managing your investments, it may be worth working with someone who can give it the due diligence it deserves.

Staying Up-to-Date with Market Trends & Adjusting Your Investment Strategy Accordingly

The investment world is an ever-changing landscape, with market trends fluctuating frequently.

Staying up-to-date with these changes is crucial if you want to make informed investment decisions and achieve your financial goals.

Monitor Your Investments' Performance

Monitoring the performance of your investments is essential for determining whether they are meeting your expectations. Regularly reviewing your investments can help you identify when it's time to sell or reallocate your assets to achieve your goals.

Keep an Eye on Economic Indicators and News Events

Economic indicators and news events can impact the market, and staying informed can help you make informed investment decisions. Keep an eye on indicators such as interest rates, inflation, and geopolitical events that could impact the economy and, in turn, the stock market.

Reading Industry Publications and Attending Investment Seminars

Reading industry publications and attending investment seminars are excellent ways to stay informed on the latest trends and best practices in investing. These resources can provide valuable insights into market trends, investment strategies, and specific industries that can help you make informed investment decisions.

Conclusion

Investing in shares through your limited company can be a wise decision, but it's essential to keep risk management in mind. To wrap up some of the points we've discussed throughout this article, allow us to say our final words of caution and advice:

To succeed in investing, you should always be focusing on exercising patience. Keep in mind that investing always carries a certain level of risk, but taking calculated risks and keeping a long-term perspective can help you maximise returns over time.

For example, avoid investing all your capital in a single company, but rather spread out your investment across different sectors.

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