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Client has recently had a heart attack and is dropping down to a few hours a week. He has brought in a guy to run his company for him.

At this stage, he doesn't want to relinquish any ownership of the company but is prepared to offer the manager a salary + a %age profit share based on the results.

Is there any way we can pay the profit share as a dividend? e.g. Issue a different class of share that participates in dividends but not ownership?

Is there another way?

Comments appreciated.


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15th Jul 2009 15:09

I'm not an employment lawyer ...
... but an offer as described sounds to me like a contractual arrangement even if not in writing and, as such, would be employment earnings. Discretionary bonuses may be a different kettle of fish but if the shares have no rights other than to receive a dividend then it is difficult to see what the purpose was in issuing them other than to avoid PAYE/NIC. And also if the agreement was that the shares would be entitled to a profit share then those shares may be worth quite a bit and if they are acquired for nominal consideration the value could also be taxable as employment income.

If you wish to go down this route then I would suggest that you give the shares rights to equity on a winding up - voting I don't think is crucial - but you could exclude any right to participate in past profits so that the shares could only be valued based upon future results. But, if there is a verbal understanding of any sort which the employee could establish as a contractual right in the event that they fall out, then it could be argued that the arrangement is a sham and that the dividends are employment income. Also, I would not pay any dividends on the shares at least until after the enquiry window for that year's return has expired - and that is not sacrosanct unless the acquisition of the shares has been properly disclosed - otherwise if dividends are paid soon after acquisition that could affect the valuation on acquisition since it would seem obvious that there was some understanding to that effect.

You could look at EMI options or partly paid shares.

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By Anonymous
15th Jul 2009 15:18

Thanks Ken
An excellent reply and as I suspected.

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