Owning Shares – The Advantages and Disadvantages
Author Richard T Lishman, Managing Director of money4dentists, a firm of specialist Independent Financial Advisers who help dentists across the UK manage their money and achieve their financial and lifestyle goals.
There are both advantages and disadvantages to selling or buying shares. However, to fully understand what owning a share entails, the concept of a limited company must first be explained.
First and foremost, it is important to note that the opportunity to become a shareholder is only possible when a practice has been incorporated. When a practice is limited, one can decide to either buy shares in the company – which continues to own the assets – or to purchase the assets that make up the practice. Other structures such as practising as a sole clinician, in a partnership or under an expense-sharing arrangement, only allow the assets of the practice to be sold or acquisitioned.
Ultimately, owning a share involves a shared responsibility of the liabilities of the business, which means a share sale can often be more complicated than the sale of assets. As a result, it would be prudent to seek advice from a trusted financial adviser when considering buying or selling a share. It is still important, however, to understand what it means to own a share, how it can be affected and how it can be used.
Dividend taxation, for instance, has an impact on shareholders. In previous years, dividends from UK shares have presented incorporations with opportunities to reduce tax outgoings. The April 2016 changes as a result of the 2015 Autumn Statement mean that all dividend income from owning shares are now tax-free up to £5,000. Any dividend income above this allowance will be subject to tax, with the basic tax rate currently standing at 7.5%, the higher band rate at 32.5% and the top rate at 37.5%.
Tax also applies during the purchase process. When a share is bought, a tax or duty of 0.5% on the transaction is usually required on the full price of the shares. Depending on whether it is completed electronically or by using a stock transfer form, a stamp duty reserve tax or stamp duty will also be required – the latter only applies if the transaction is over £1,000.
Once the stock is purchased, the owner inherits both the company's assets and liabilities, including the dental premises and any other property owned by the limited company – this could be both an advantage and disadvantage. Unfortunately, the buyer of the share does not have the power to pick preferred assets or liabilities, and will instead automatically acquire all assets and all liabilities. Another consideration that could be seen as either a benefit or drawback, depending on how you look at it, is that the business assets remain owned by the company being acquired.
There are also clear notable advantages of buying and owning stocks, including the fact that shareholders can enjoy the benefits of limited liability. This means that if the business was financially underperforming or in trouble, a shareholder's only loss would be the value of the shares and any loans made to the company – all personal assets are safe. What's more, if the value of the company increases, the worth of the stock increases – a win-win situation if one invests wisely.
For those looking to sell shares, it bears the advantage of raising capital for a practice without incurring debt that will have to be repaid. Alternatively, when a company is doing well and shares are in demand, it could pay to offer one's stocks to other shareholders at a profit. The other way of looking at it is as a majority shareholder, the constant need to justify one's actions to the others who own shares could give the company a sharp focus and enhance profitability.
On the downside, selling shares means relinquishing a piece of ownership with every share sold, and with that comes the shareholder's right to request information on business decisions. While this can provide motivation to perform well, as mentioned, it could result in information being revealed that the main shareholder would rather have left untold. Lastly, it is important to note that when shares are sold, one may have to pay capital gains tax if a profit is made on the sale.
All in all, the process of buying, selling and maintaining shares can be complicated and there is no doubt that dentists can benefit from the advice of Independent Financial Advisers such as those at money4dentists. It also wouldn't go amiss to keep informed on the most recent taxation changes and how they could affect both incorporating and shares.
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