Running two businesses under one limited company can seem like a sensible way to keep costs and administration under control when you already have an established company and decide to start something new.
In some circumstances, running two businesses under one limited company may be exactly the right approach. This may be the case where the new activity is relatively small, carries little additional risk and is unlikely to need different owners or outside investment.
The position can change as the second business grows. Keeping both activities in one company could expose the established business to new commercial risks. It may also make it harder to introduce investors, bring in a business partner or eventually sell one business without the other.
Tax also matters, particularly when considering losses, VAT registration and the Corporation Tax associated company rules.
In this guide, we look beyond the immediate cost of running another company and consider the tax and commercial consequences of one company versus two. We also explain how the structure can affect funding, ownership and a future sale. This can help you decide whether today's simpler option could restrict the businesses as they develop.
Can two businesses operate via the same company?
A UK limited company can carry on more than one business activity, so a new activity does not automatically require a separate company.
For tax purposes, however, it may be necessary to establish whether the activities form part of the same trade or represent separate trades. HMRC considers their nature, organisation and the extent to which they are interconnected, interlaced or interdependent.
Consider Dave, whose company, Enterprise Ltd, operates a software consultancy generating annual profits of around £150,000. It has also accumulated approximately £250,000 of cash and other assets. Dave begins developing a subscription software product using the consultancy's existing team and initially offers it to some of the same clients.
Operating both activities through the existing company may initially be commercially straightforward. As the software business develops its own customers, employees, contracts and intellectual property, the position may change. A separate company may then provide a better structure.
Separate bookkeeping can measure the performance of each activity, but it does not create legal separation. The assets accumulated by the consultancy and liabilities arising from the SaaS operation ultimately remain within the same company.
When does one company make more sense?
Using the existing company can be a practical choice while a new activity is being tested, particularly where it remains closely connected with the established business.
Suppose Dave plans to spend £20,000 developing his software product. The existing team will work on it, and the first customers are likely to be consultancy clients. Dave also has no immediate requirement for outside investment or different ownership. At this stage, a separate company may provide few commercial advantages.
The position can alter as the new business develops. Its own employees, customer contracts, intellectual property or funding requirements may indicate that it is becoming a standalone venture rather than another activity of the existing company.
At this stage, running two businesses under one limited company may still make commercial sense. Dave should review that decision as the new venture develops, rather than waiting until it has accumulated substantial value.
How could early losses affect your decision?
Early losses can influence the structure where an established business is already generating substantial profits.
Suppose Enterprise Ltd makes a £150,000 trading profit from Dave's consultancy business. During the same accounting period, the new SaaS activity incurs a qualifying £50,000 trading loss.. If Enterprise Ltd carries on both trades, it can generally claim current-period relief for the loss against its total profits. The detailed loss relief rules must still be satisfied.
The position changes if Dave establishes a separate company for the SaaS business. Owning both companies personally does not allow the SaaS company's £50,000 loss to be surrendered to Enterprise Ltd.
Operating both trades through Enterprise Ltd could therefore provide earlier tax relief for initial SaaS losses. Two companies owned directly by Dave would not automatically achieve the same result.
Could an additional company increase your Corporation Tax liability?
Setting up a second company can affect the Corporation Tax rate. Companies under common control may be treated as associated companies for these purposes.
HMRC confirms that the £50,000 small profits limit and £250,000 upper limit are reduced according to the number of associated companies. If Dave controls Enterprise Ltd and a separate SaaS company, the limits would therefore broadly reduce to £25,000 and £125,000 for each company.
Enterprise Ltd could consequently enter the marginal relief band at a lower level of profit. It could also reach the main 25% Corporation Tax rate once its profits exceed the reduced upper limit.
The rules become more involved where different but connected people control the companies. Commercial relationships between the businesses can also become relevant. We explain these areas in more detail in our guide to the Corporation Tax rules for associated companies.
Dave should therefore calculate the Corporation Tax effect before incorporating another company, particularly where Enterprise Ltd is already profitable. A higher Corporation Tax liability, however, does not necessarily outweigh the commercial benefits of separating a growing business from the existing company.
Would a second company have its own VAT threshold?
Separate companies can have their own VAT registration positions. However, setting up an additional company does not necessarily provide two separate VAT thresholds.
Suppose Dave establishes a separate company for the SaaS business alongside Enterprise Ltd. The new company might develop its own product, employ its own staff and enter into separate customer contracts. It may also eventually have different shareholders. These factors provide clear commercial reasons for operating the businesses separately.
The position would be very different if Dave created another company carrying on essentially the same consultancy activity. It might serve the same customers and share the same resources, primarily to keep Enterprise Ltd below the VAT registration threshold.
HMRC can challenge arrangements where business activities have been artificially separated and this results in VAT avoidance. When considering whether separation is artificial, HMRC looks at the financial, economic and organisational links between the businesses.
We explain how these rules operate in more detail in our guide to business splitting and VAT.
The VAT position should therefore follow the commercial structure of the businesses, rather than the structure being designed primarily around the VAT registration threshold.
Could a new business venture put your existing business at risk?
For an established company with valuable assets, commercial risk can be just as important as the tax consequences of the structure.
Suppose Enterprise Ltd has accumulated £250,000 of cash and other assets from Dave's consultancy business. The new SaaS venture may employ staff, process customer data, license technology and enter into contracts that create risks the consultancy did not previously face.
Running two businesses under one limited company means the new liabilities sit within the same legal entity as the assets accumulated by the consultancy. Separate bookkeeping or management accounts do not provide legal protection against liabilities arising from the SaaS venture.
A separate company can create a legal boundary between the businesses, although guarantees and other contractual arrangements may reduce that protection.
Dave therefore needs to weigh the additional cost of another company against the value accumulated within Enterprise Ltd and the risks created by the new venture.
What if you are starting the new venture with someone else?
Suppose Dave owns 100% of Enterprise Ltd but plans to develop the SaaS venture with Priya. She will have a 30% interest in the new business. Keeping the SaaS activity within Enterprise Ltd could complicate that arrangement. Giving Priya shares in the company could also give her an interest in Dave's established consultancy.
A separate company provides a clearer structure. Dave can continue to own Enterprise Ltd outright, while he and Priya own the SaaS company in the proportions they agree.
Dave and Priya can also deal with ownership, voting rights and future changes to the shareholding separately from Enterprise Ltd. This can become particularly useful if another shareholder or investor joins the SaaS business later.
Where the ownership of the new venture will differ from Enterprise Ltd, establishing a separate company at an early stage may therefore avoid a more complicated restructuring later.
You can find further guidance on company ownership, shares and other issues affecting owner-managed companies in the Limited Companies section of our Business Advice Hub.
What if you require external investment?
The structure can become particularly important if the new venture later requires funding from outside investors.
Suppose an investor offers Dave £300,000 for a 20% stake in the SaaS venture. If it remains within Enterprise Ltd, Dave cannot issue shares representing 20% of the SaaS business alone. Shares in Enterprise Ltd could also give the investor an interest in the established consultancy.
Dave could still separate the businesses before the investment. However, this may involve transferring intellectual property, customer contracts and other valuable assets into a new company. Valuations may be required, and the restructuring could create additional tax and legal considerations.
Establishing the SaaS business as a separate company from the outset can make it easier to introduce future investors without affecting the ownership of Enterprise Ltd.
Where external investment is a realistic possibility, considering the structure before substantial value accumulates in the new venture can avoid a more complicated restructuring later.
What if you eventually want to sell one business?
The company structure can become particularly important if Dave eventually wants to sell one business while retaining the other.
Suppose the SaaS venture grows significantly and Dave receives an offer of £2 million. He nevertheless wants to retain his consultancy through Enterprise Ltd. If the SaaS business operates through a separate company, it may be possible to sell the shares in that company without affecting Enterprise Ltd.
If both businesses operate through Enterprise Ltd, there are no separate shares in the SaaS venture for Dave to sell. Dave may instead need to sell the SaaS business and its assets. Alternatively, he may need to separate the activities before completing a share sale.
Either approach can introduce additional tax, legal and commercial considerations at precisely the point when Dave is trying to complete a sale.
Separating businesses that are likely to develop independently can therefore provide greater flexibility if Dave later decides to sell one while retaining the other.
Can Enterprise Ltd fund the new company?
Keeping the businesses separate does not mean Dave must fund the new venture personally. Enterprise Ltd may be able to provide the funding instead.
Suppose the SaaS company requires £80,000 and Enterprise Ltd has sufficient cash available. Enterprise Ltd could potentially lend the money to the new company or subscribe for shares in it.
The choice affects the relationship between the companies. A loan would normally remain repayable to Enterprise Ltd, whereas subscribing for shares would give Enterprise Ltd an ownership interest in the SaaS company.
Dave could instead withdraw the £80,000 and invest it personally. However, extracting the money from Enterprise Ltd could create a personal tax liability.
The availability of cash within Enterprise Ltd should therefore not determine whether both businesses need to operate through the same company.
Should you consider a holding company structure?
If Enterprise Ltd and the SaaS company are both expected to grow, Dave could consider owning them through a holding company rather than holding the shares in each company personally.
The holding company would own Enterprise Ltd and the SaaS company as separate subsidiaries. This preserves the legal separation between the businesses while bringing them within the same corporate group.
A qualifying group structure can also provide greater flexibility. Subject to the relevant conditions, group companies may surrender qualifying losses between them. Funds may also move around the group without Dave first having to extract them personally. A group structure may also provide advantages if one of the businesses is eventually sold.
There will be additional administration, and a holding company will not be necessary simply because Dave operates two businesses. However, Dave should consider the structure early if he expects both ventures to grow and accumulate significant value. This may avoid a more complicated reorganisation later.
We look at these issues in more detail in our article on the benefits of setting up a holding company.
Is the additional cost of a second company justified?
There will inevitably be additional costs involved in operating a second company, including separate accounts, Corporation Tax returns and Companies House requirements.
For Dave, those costs may be difficult to justify while the SaaS venture is relatively small, uses Enterprise Ltd’s existing resources and is still being tested commercially. In those circumstances, running two businesses under one limited company could be perfectly reasonable.
As the SaaS business develops, the calculation changes. The position changes if the SaaS business accumulates significant value or employs its own staff. Different shareholders or new commercial risks can also alter the calculation. Dave should then weigh the cost of a separate company against the protection and flexibility it provides.
Saving on professional and administrative costs in the short term may prove a false economy if two valuable businesses subsequently become difficult or expensive to separate.
The appropriate structure should reflect how Dave expects the new venture to develop, rather than simply which option costs less to administer today.
Choosing the right structure for both businesses
Running both businesses through Enterprise Ltd may make sense while the new venture remains small and closely connected with the existing business.
As it develops, however, tax may become only one part of the decision. Protecting the value accumulated within Enterprise Ltd may become increasingly important. Different owners, external investment and the ability to sell either business separately can also influence the decision.
In our experience, the structure is easiest to review before the new business has accumulated substantial value, entered into significant contracts or brought in other shareholders.
Reviewing the structure early can avoid a more complicated and potentially costly reorganisation once significant value has accumulated.
Considering a new business venture?
If you already own a limited company and are planning another business venture, deciding on the structure early can avoid unnecessary tax and commercial complications later.
Please complete our Business Questionnaire and we can review whether the new venture should operate through your existing company, a separate company or potentially as part of a group structure.
We can consider the tax implications alongside ownership, funding, commercial risk and your longer-term plans for both businesses.