Assignment
Partnership or Ltd company? In 2003 Gandlake Computer Services, which develops business software in Newbury, Berkshire, changed to a private limited company (Ltd) after trading as a partnership since 1971. It became a limited company after managing director John Gandley decided that it would help to grow the business. Gandley argued that although the partnership was doing well and had a strong cash flow, because, as a partnership, it was not publishing accounts at Companies House, that aspect of the business was invisible to its clients. His preference was for the market to see that Gandlake was very solvent and profitable and had good reserves of working capital so that people could compare it with its competitors. This visibility as to its competitive edge would then be used as a strong selling point in marketing the company. He added: ‘I also wanted to become a limited company because, as the business grew and we got bigger clients and bigger contracts, our lawyers advised us that it would be wise to move from having unlimited status to limited liability. Another reason was that all our clients were either limited companies, plcs or big government departments and they didn't really understand the concept of partnerships. It was always a potential obstacle to doing business that had to be overcome'. In Gandley's view, making the switch was time-consuming but straightforward. ‘There was a lot of paperwork. It took about six months of preparation with lawyers and accountants. We also had to have the whole operation valued by external company valuers to put a market price on the enterprise'. Gandley estimated that the whole process cost between £100,000 and £120,000, but he expects to recover this in his first year through tax savings and business expansion. John Lisby, regional director of the business adviser Numerica, said that every sole trader or partnership should now be seriously looking into the option of becoming a limited company because the tax position for the latter was so much more beneficial. He explained that owners of small businesses that make a profit of less than £300,000 could benefit in two ways - from lower corporation tax rates and lower National Insurance payments. ‘As a sole trader you are liable for tax on all the profits that you make, whether or not you actually take them out of the business. So even if you decide to retain the profits in the business, you'll still be liable for corporation tax of up to 40% on them. If, however, you are a limited company, then any profit you retain in the business will be taxed only up to a maximum of 19%.' Lisby said owners of limited companies also benefited if they decided to take some profits out of the business because they had the option of getting it in the form of a dividend instead of a salary. Dividends carry a lower tax rate and also do not require payment of National Insurance.
Question
1 Identify the advantages to Gandlake of changing from a partnership to a private limited company.
2 What might be the disadvantages of such a move?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.