Definition of “Close Company”
A Close Company is a company resident in the UK that is under the control of:
- Five or fewer participators, or
- Any number of participators who are also directors.
A close company is delineated by its structure of control, particularly concerning the distribution of control rights and benefits.
Alternative Asset-Based Test
Besides the control mechanism, there is an asset-based test to classify a company as a close company:
- If five or fewer participators, or any number who are directors, would be entitled to more than 50% of the company’s assets upon winding up.
Principal Consequences
The primary consequences of being classified as a close company include tax implications by HM Revenue:
- Benefits in Kind: Certain benefits provided to shareholders can be treated as distributions.
- Loans or Quasi-Loans: Loans made to shareholders can be taxed as distributions.
Examples
- A small family-owned business controlled by three brothers and their father can be classified as a close company if they hold more than 50% of the shares.
- A technology startup where the four founding members, who are also directors, hold the majority of shares.
- A manufacturing firm consisting of five business partners, each holding equal shareholding, with four of them being directors.
Frequently Asked Questions (FAQs)
What is considered a participator?
A participator is an individual who has a financial interest in the company, such as shareholders and stakeholders with financial influence.
Are all small companies considered close companies?
No, not all small companies are close companies. The classification depends specifically on the control and distribution of shares among participants and directors.
How does being a close company affect taxation?
Close companies may face different tax treatments, particularly regards benefits given to shareholders and loans, which can be treated as company distributions by HM Revenue.
What is the difference between a close company and a closed company?
In the UK, the term “close company” is used, while in the USA, the American equivalent is termed “closed company.” Both refer to similar structures with limited and closely-held ownership control.
Can a close company avoid the classification?
To avoid being a close company, the company must change the structure of shareholding and director participation to exceed the thresholds defined by the asset-based test and control criteria.
Related Terms
Participator
A person or entity with a financial interest in a company, such as shareholders or key stakeholders.
Benefits in Kind
Non-cash benefits provided to employees or directors, which might include company cars, private medical insurance, and other perks.
Distribution
The payment of company profits to shareholders, which can include dividends, benefits in kind, or loans.
Close Investment Holding Company
A specific type of close company primarily set up to hold investments rather than conduct trade, often facing stricter tax rules.
Online Resources
HM Revenue & Customs (HMRC) Guidelines
GOV.UK Close Company Information
Suggested Books for Further Studies
-
“Core UK Tax Principles” by Malcolm James
- Provides an extensive understanding of UK tax principles, including classifications like close companies.
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“Taxation of Small Businesses” by Malcolm Finney
- Delves into tax treatments and classifications for small businesses, particularly relevant for close companies.
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“Accounting in a Nutshell: Accounting for the Non-specialist” by Janet Walker
- An accessible guide on various accounting principles that can shed light on the nuances of classifications like close companies.
Accounting Basics: “Close Company” Fundamentals Quiz
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