New Company

New Company

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I am buying a business with a newly formed company.
An existing customer is willing to assist and invest. How do i decide between debt and equity?

If equity - I was only going to put £100 share capital in - so is it possible for their shares to be non-voting? They would have much more shares than me but they would be non voting - would that look a bit odd?
Mike

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By martinfoley07
13th Jun 2005 21:27

...commercial deal...and tax consequences....
Mike
The capital structuring can and should really be based on the commercial arrangement. Sort out the commercial arrangement with the customer and you will have 99% of the answer for the capital structure, subject of course to tax planning!! So the answer to your first question (equity or debt) is initially one of - what are the "bones" of the deal?

Presumably you and your customer have agreed the "bones" of the deal? e.g. he puts in say £10,000 for 10% of the business? Or £10,000 for £1,000 per annum running return, and repayment of capital in 3 years? Or.....etc etc. If not, I would recommend you address this question as a commercial decision/negotiation rather than a structuring one.

You can then play with the capital structure accordingly, including ordinary share capital of £100 only, £10,000 non-ordinary share capital, or £10,000 loan notes etc etc. I imagine that the capital structure is not very sensitive to accounting/balance sheet/gearing/bank covenant requirements, as these are not mentioned. If they are, you need to see what constraints the company may have from that angle on its capital structure.

Next you and the customer need to consider tax and other consequences of shares vs loans. In over-simplistic terms, the company will get a CT deduction for interest on loans and the customer will be taxed on the interest income. For dividends on ordinary and non-ordinary shares, it starts to get slightly more complex, and dependent e.g. if customer is incorporated, and what shareholding is negotiated etc.

I'm afraid it is an area where professional advice should be sought, rather than a simple "this is what regulation X says".

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