There are two schools of thought when it comes to profits. They can either be taken as dividends or re-invested into the business. But there is a third strategy that has a foot in both camps; investing the profits of a limited company in the stock market. But where do you start and what are the benefits?
The usual ways of investing or spending the profits from a limited company are:
- simply leaving it in the company account (although this doesn’t do much more than show a positive cash balance)
- distributing the funds as dividends
- allocating it as company pension contributions
- or utilising a high interest rate savings account or bond (although interest rates remain very low)
But if you were to start thinking about your company’s profits in the same way as your personal savings, you might consider investing it in the stock market.
Investing in individual stocks or the whole market?
One of the more important decisions becomes whether to invest in individual stocks or through an index-linked equity fund. Choosing the equity fund route means buying shares in a portfolio overseen by a fund manager responsible for buying, selling and holding on to stock.
If you decide to buy individual stocks, it is your responsibility to monitor the performance of those shares and either reinvest any profits or take them as capital gains. So it is good to ensure that your investment strategy takes heed of the goals of the company and its shareholders.
Are you going to invest long-term or short-term?
For some people trading in stocks, it can be a matter of buying positions for short-term gains, which requires constant attention to the markets and good timing to execute trades. A limited company, though, is likely to favour long-term investment strategies that usually require patience and commitment while the markets fluctuate. Long-term investments are often up to ten years, enough time for stock market yields to average out over time.
When you are buying stocks and shares, it is important to choose a trading platform that offers a wide level of support on the stock market. You might also benefit from deeper market analysis and technical assistance when needed. Certain platforms such as Saxo can even keep detailed P&L and returns reports that can be downloaded for bookkeeping.
Tax implications of investing in the stock market
Of course, with all types of investments there is a risk that prices can go down as well as up, although the tax implications for your capital gains remain constant. Taxation is different from your personal investments in the case we’re examining because company investments are subject to capital gains tax. On the flip side, companies can receive an indexation
allowance which effectively increases the base cost of the investment and outweighs the benefits of what you’d expect to receive through personal annual exemptions. It is worth ensuring that you’re not breaching the line of becoming a close investment company (CIC), where the company is used as a non-property investment company and higher rates of tax are charged. For most trading companies, this isn’t the case.
If you’re in charge of a limited company and looking to choose where to invest profits, the choices are simple – either pay it as dividends or decide to use it as an investment in the same way an individual might do with a lump sum. While the tax and investment goals might differ, the process of investing in stocks and shares is the same and provides the same advantages in the long term as any other market-linked savings or investment scheme.