Limited by guarantee: how to distribute profits?

Limited by guarantee: how to distribute profits?

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I am preparing accounts for a company mistakenly set up as limited by guarantee instead of limited by shares. The client is a doctor subcontracting to the NHS and has been paying himself in dividends since the date of incorporation in July 2010.

I have checked the articles of association (standard ones) and it states that a company limited by guarantee is allowed to distribute company profits to members and this can take any form.

My question is really, what form should they be distributed to minimise tax liability? There have been several queries like this on accountancy web and while none of the answers has been definitive the jist is that as long as the company isn't a not for profit organisation then dividends are ok. It does seem strange but I have not been able to find an example anywhere of how directors or members may receive payment from a company limited by guarantee.

I am in the process for closing the company and starting a new one limited by shares to avoid this problem going forward.

Any information would be very helpful

Replies (10)

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By petersaxton
20th Mar 2011 17:10

Articles

"I have checked the articles of association (standard ones) and it states that a company limited by guarantee is allowed to distribute company profits to members and this can take any form."

Where does it say that?

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By rkmoverley
20th Mar 2011 18:06

Current standard articles of association for a company limited b

Directors’ remuneration

19.—(1) Directors may undertake any services for the company that the directors decide.
(2) Directors are entitled to such remuneration as the directors determine—
(a) for their services to the company as directors, and
(b) for any other service which they undertake for the company.
(3) Subject to the articles, a director’s remuneration may—
(a) take any form, and
(b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director.
(4) Unless the directors decide otherwise, directors’ remuneration accrues from day to day.
(5) Unless the directors decide otherwise, directors are not accountable to the company for any remuneration which they receive as directors or other officers or employees of the company’s subsidiaries or of any other body corporate in which the company is interested.

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By Mouse007
20th Mar 2011 21:00

Not Dividends then

Director DOES NOT equal Member. Dividend DOES NOT equal remuneration .

Directors work, shareholders do not. Remuneration is earned income, dividends are investment income.

It is Directors' remuneration (in any form maybe, but still directors' remuneration) not a dividend distribution to a member.

Looks like it should all go on the P35 - grossed up of course - to me.

Hope the "incorporation error" was not yours.

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By aadil
21st Mar 2011 01:25

.

 Hope the "incorporation error" was not yours.

Posted by Mouse007 on Sun, 20/03/2011 - 21:00
This comment is entirely uncalled for and irrelevant to the question asked

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By petersaxton
21st Mar 2011 07:37

Valid

Given the confusion between director and member and remuneration and distribution I think it's a valid point.

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By rkmoverley
21st Mar 2011 10:03

Reasonable?

Thank you

There definitely has been an incorporation error here so maybe that was valid.

A uk tax forum has thrown up the following proposal:

"what you should really do is pay the funds back to the company and treat it as a loan repaid then wind up the company distributing the funds as a capital distribution (likely 10% tax) then start a new co ltd by share capital and pay dividends to using the new co"

Reasonable?

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By petersaxton
21st Mar 2011 10:16

Yes

It seems the best solution.

I thought, from an earlier thread, that the client made the error upon incorporation?

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By rkmoverley
21st Mar 2011 11:02

True

Yes that is true

 Thank you

 

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Teignmouth
By Paul Scholes
21st Mar 2011 12:55

Check the Articles again

Unless there's a specific prohibition in the articles companies Ltd by guarantee can distribute profits to members.

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By petersaxton
21st Mar 2011 15:56

Paul is right

The first paragraph supports Paul's view. It includes a reference.

http://en.wikipedia.org/wiki/Private_company_limited_by_guarantee

 

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