SEPARATE OWNERSHIP
Business owners of start-ups should have personal ownership of their websites, domain names, brand names and copyrighted material whilst operating their businesses through their newly formed limited company. There are 2 reasons for this:
- DOMAIN NAME AND WEBSITES CAN BE SEIZED BY A LIQUIDATOR – A limited company that gets into financial difficulty can have all its assets seized by a liquidator. If the domain name a company uses to promote its business is registered in the name of that company, it forms a part of it’s assets. Brand names, copyrighted material and Intellectual Property in the name of the liquidated company will also be lost. If your company goes into liquidation, retaining title to a successful website may allow you to start trading without loss of your search engine ranking (SEO/SERP) or loss of sales generated by Social Media Marketing (SMM). Your newly formed company can be profitable from the day it starts trading, if it is free of debt and has lower overheads and gets the use of an already successful website.
- POTENTIAL TAX SAVINGS – Recognition of the value of your website’s SEO ranking and your SMM success gives you an opportunity to exploit lower rates of capital gains tax as well as using Capital Gains Tax Allowances.
- SAVE £2400 – The annual capital gains tax (CGT) allowance is due to rise to £12000 per person in April. The sale of your website to your company (or to another associated group company, to keep your website and domain name safe) would allow you to receive a payment of £12000 from your company, tax free. Assuming basic rate of tax would otherwise apply, you would save £2400 in tax.
- MARRIED COUPLES AND CIVIL PARTNERS SAVE £4800 – Transfers of assets between spouses is exempt from capital gains tax. So, by gifting a share of your domain name, website and SEO value to your spouse (or Civil Partner), you can take advantage of both CGT tax-free allowances amounting to £24,000 and save £4800 in tax.
- UTILISE CGT TAX RATES OF 10% & 20% – Capital Gains tax rates are significantly lower than income tax rates.:
- An individual’s tax on income can be as much as 45%
- An individual’s tax on dividends received can be as much as 38.1%
- Capital gains tax rates are 10% for basic rate payers rising to 20% for higher rate payers
A significantly high value of your website’s SEO ranking gives you an opportunity to exploit lower rates of capital gains tax as well as using Capital Gains Tax Allowances.
VALUING THE SEO RANKING AND SMM SUCCESS OF A WEBSITE
A quick google search will show you that there are many companies proposing ways of valuing SEO ranking. These are usually marketing companies that create websites or run SEO and SMM campaigns. The valuations are a way that potential customers can measure the results of a campaign by establishing a return on their investment (ROI).
VALUATION
- Domain names have an intrinsic value of their own. Usually, it is not very much but a look at a reference site such as DN Journal will show you that a domain name can be worth £100,000+
- A website is usually nothing more than text with e-commerce and its value is the cost of putting it together and creating the copyrighted material.
- A good SEO ranking attached to a domain name and a website is what adds value to a website. Valuing this is very difficult. However, the concept of a valuation is easy to understand. When you start marketing a business on the internet you will be advised that it takes anything up to 3 years to maximise your SEO ranking. The aim is to appear at the top of search engines for organic searches of your keywords and to have a well-established social media presence which generates sales. This results in “free sales” as opposed to sales generated by pay per click (PPC) advertising. The following example illustrates the point:
Company A has been marketing for some time and makes 500 sales per month.
- 200 sales per month are generated from PPC conversions at an average of £50 per conversion
- 100 sales per month are generated from repeat business with an existing client base, and cost nothing.
- 200 sales per month are newly generated from organic searches and social media at no cost.
- The profit from each sale exceeds the average PPC of £50.
Company B is a start-up offering the same product and is in the same market as company A.
- It can use PPC advertising to generate sales. As a new advertiser it would pay £50 or more for each sale generated. It would also have to pay for the creation of a website and the content.
- It cannot generate sales from a client base, until it has established one over a number of years. It may be possible to buy a client base from company A or another company in its market. The value of an existing client base is normally referred to as goodwill.
- It cannot generate sales from free organic searches, because it has no SEO ranking and it cannot generate sales from a social media presence because it does not have one. If it could buy the website and SEO ranking of Company A (or a similar website from another company in the same market), Company B might be prepared to pay £10,000 per month if the SEO created 200 sales per month at £50+ profit. The sales would create a break-even position and generate an established client base for repeat business.
- As each month passes, Company B would create new content of its own and generate a social media presence and SEO ranking. It would need to pay less each month to maintain sales of 200 per month. After 3 years the purchased SEO would have no value. On that basis the established value of the SEO is £0 after 36 months.
SEO and SM valuation. Based on the information above the valuation of the SEO ranking that company B would be prepared to pay could be established by a simple formula:
- The saved acquisition cost of each sale -£50, multiplied by
- The number of sales each month – 200, multiplied by
- The number of months the SEO ranking of the existing website and material would take to replace – 36 months on a reducing basis so that in the last month it was worth £0 because it is completely replaced by the new effort.
That Gives a value of (36 months X £50 conversion X 200 monthly sales) / 2 = £180,000
Given the above example it would be possible to take as much as £180,000 out of a limited company which would be subject to capital gains tax rates rather than income tax rates. Alternatively option to capitalise the value and lease to the business on a rental basis this allows the avoidance of national insurance and can be shared with a spouse.
LEGAL MATTERS
There is company law covering financial dealings between directors and their companies. These laws are designed to protect shareholders in larger companies and not small owner managed companies. However, if you find yourself having to convince HMRC about your transactions and valuations, it helps to have paperwork in place to show that you have complied with the law and can support your valuation.
- A company can’t enter into a substantial property transaction with a director of a company without the consent of the shareholders. To approve a substantial property transaction the shareholders must pass an ordinary resolution at a general meeting of the company or submit a written resolution.
- If an asset is worth less than £5000, it is not classified as a substantial property. An asset valued between £5000 and £100,000 will qualify as “substantial” if it is worth more than 10% of the assets of the company. If the value exceeds £100000, it is deemed to be substantial.
- A substantial property is a non-cash asset, such as an SEO ranking, IP, Brand, copyrighted material or goodwill.
IN SUMMARY
If you are starting a new business, you may want to consider opening two limited companies and keeping the domain name and website registered in your own name. One company for trading and the other to be kept dormant. The dormant company may allow you some tax planning options when you have optimised the value of your website.
If you already have a successful website, consider transferring it to another company as a means of protection.
Please note: This article should not be relied upon when making any decisions or taking any action of any kind. Please consult professional advisers before making any decision based on the contents of this blog.