One discussion we regularly have with our clients is what to do with surplus corporate profits. These occur when a limited company makes profits (and turns these profits into cash) to such an extent that there is cash left in the business over and above what is needed to fund working capital (stock, work in progress, debtors etc) for the foreseeable future.
If the company has expensive debt, it may be sensible to pay this off (get your accountant to do some number crunching), particularly if the money is sat in an account earning next to nothing in interest. However, if there is no debt, should the cash be extracted or left in the company?
As is often the case in these scenarios there are pros and cons to leaving cash / profits in the company:
The pros of leaving surplus cash and profits in a company
- You will probably pay less tax overall in the short term (particularly as Income Taxes are so high currently) – it may be sensible to extract them when tax rates are lower (the cynics may suggest this will happen in the run up to the next General Election!);
- The company’s credit rating will probably improve (so you may be able to negotiate better credit terms with suppliers or cheaper finance);
- There will be less chance of needing to borrow money in the future and a reduced risk of having cash flow problems;
- You won’t be tempted to be frivolous with the money (it isn’t yours if kept in the company); and
- You may be able to pay less tax overall in the long term if the profits can be extracted under the Capital Gains Tax regime (talk to your accountant about this too).
The cons of leaving surplus cash and profits in a company
- They are at risk if the company fails i.e. the cash will have to be used to pay creditors (if this is a concern a holding company may be an option); and
- If the cash is in a corporate bank account, it may be earning less interest than if it was invested personally.
So, whilst it is difficult to give a definitive answer, the best approach is often one of balance. Taking some of the surplus out (and taking the tax hit on the chin) and investing personally (or paying off personal debt) and leaving some in the company is often a sensible approach.
If you need help deciding what to do with your surplus cash (or improving your company’s profitability / tax efficiency to generate some), please contact help@360accountants.co.uk or call 01482 427360.
