Hi
I run a small manufacturing business which is growing fast, there are 2 directors, 50% each, we have a team of 7 with a bookkeeper and an external Accountant who visits twice a week.
I have the opportunity of employing a new Finance Manager, and my thought process is that he will replace the external Accountant and work with the bookkeeper.
He has asked about a future position as the Financial Director.
I am a little uncertain on this position and was wondering if I can receive some advice?
- If I were to make him Finance Director, do I have to give him a share in the business? I don’t want him to have any voting rights but perhaps a small share of the business if I ever sold it.
- Would he still be paid as PAYE or like me and my partner through Drawings and Dividends?
- Tell me what benefits this arrangement would offer me.
I don’t want him coming into the business and changing the structure \ direction after me and my partner have worked hard to build.
I know the info is limited but hopefully you can get a feel for my concerns.
Thanks
Replies (28)
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Directors and shareholders are often the same people, but there is no requirement for it to be so.
Being the finance director would, subject to the articles, allow him to act as a director for the company, doing all the things directors do. Presumably, as a director, you know what those are.
I would have advised you to ask your accountant, should you need more information than that, but you're sacking him so perhaps not.
If your new finance director is fully qualified and competent then he may well be able to fulfil the role of your accountant, leaving you no need for an external agent, but it puts you in the awkward position of having to rely on him to assess whether or not he's doing his job correctly, because it doesn't sound like you're fully up to speed with the ins and outs of how companies work.
Shares not necessary....maybe later if he/she is good to offer long term commitment by both parties but nothing can be positively agreed at the outset, only a broad outline. Almost certainly he/she will be paid under PAYE and definitely if he/she has no shares. You want someone to assist the business and who will add to it....maybe a fresh pair of eyes and changing something will actually be of benefit. Does the ongoing salary and related costs justify the appointment? It is good a growing business is being pro-active and being ahead of the game rather than trying to expand and then worrying about the underlying support later on. It boils down to what you want....do you see real benefits or can you manage with your existing arrangements which will almost certainly be cheaper overall.
Almost certainly he/she will be paid under PAYE
The OP says "Would he still be paid as PAYE or like me and my partner through Drawings ... " so apparently there is a magic way he has of extracting remuneration from a company without PAYE.
You would need to sit down with the other director and work out what roles and responsibilities you want the Finance Manager to undertake. That would then tell you what benefits you would get over using an external accountant. Are the accounts going to be prepared in house by the finance manager or is the external accountant going to do them?
You don't need to give them any shares in your business.
If he is an employee then he would be PAYE not drawings and Dividends.
If you don't want any changes to your business I would suggest that it would be pointless employing a Finance Director if you didn't want their input. You sound as if you have doubts yourself about if this is the way to go.
I. No- incentives to keep him may be needed. I act as FD/Manager re my employers (both in effect retired) but have no stake in the business, I get by on my salary and the odd bonus.
2. Yes
3. More commercially aware input as will get to know business inside out and in real time. May take other load beyond accounts types roles- I do virtually anything these days from legal work to HR to ordering toilet rolls in bulk and searching better prices for services.
The catch is that depending on ability you likely may still also need external accountants re tax etc, in addition anyone even from practice can get stale pretty fast- I do a fair bit of reading but at end of the day reading is one thing, doing another, and I consult with third party accountants re our tax planning.
I would advise allowing a bit of free reign re organisation process and possibly software, you want him/her to have a quasi ownership interest in the business and if you restrict freedom to act that may be reduced.
p.s. If Edinburgh based I could be in the market for a P/T FD role to augment existing position, once my P/T practice is wound up later this year; I have Thursdays and Fridays free. ☺
Too far to commute and your beer down south is weird.
I should have known you were not in Scotland, we do not have many manufacturing entities up here, I dealt with a few in my youth in the west but since returning to Edinburgh they have pretty much not existed as clients.
Good luck with your search and do consider if a P/T role might be a better way to start and see how it develops.
My current employer hired me from my then practice employer in the mid 1990s, started 1 day a week, then 2, days and then moved to 3 days, by which point they could employ me full time for less than they were paying the firm I was with and made me an offer I could not refuse.
A P/T try before you buy approach may be worth considering to see how it goes.
Just a thought.
Tennents is not beer, it is lager, and not very good lager.
Deuchars is worth drinking, or 80/- ,Belhaven can be worth drinking- beers not lager.
The business is growing fast, and in manufacturing - so presumably lots of fairly complex stuff happening - stock, costing etc.
The annual accounts are one thing (and best left to an advisory firm). It is day to day nitty gritty of running your business efficiently that you need.
In my case, I do that role (ie on payroll, on board etc).
I prepare full management accounts, and also the final trial balances for the year. I leave our auditors to worry about the layout - but they never have any adjustments so I must be doing something right.
1. No - you really should know the difference between directors and shareholders by now
2. Yes - and you are not paid in 'drawings', you should know that by now
3. An FD would be able to advise you on 1 and 2, above and lots of other financial stuff you don't know about.
I would echo Andy's comments. Having read your question and skimmed your replies, it's clear you don't understand the difference between shareholder & director, and salary and dividends.
You should NOT be getting rid of your accountant here. This is the person you need the most to help you through this. Ask them, not us.
You can be a director by job title, but not be a companies house director (though you have to be careful about 'shadow directors')
Until you are 100% happy with the job/role the new FD is doing under NO circumstances should you give him/her any shares.
Plus in the interim DO NOT sack your accountant, as who will be checking what the FD is up to !
No. Dividends can only get paid to shareholders.
Think of it this way - directors run the company, shareholders own the company. Directors and employees take salary / remuneration via the payroll. Such salaries / remuneration are costs associated with running the company and are deductible in computing the company's profit.
Shareholders, on the other hand, take dividends from the 'after-tax profit'. What they do not draw from the after tax profit is retained in the company.
To be able to take a dividend a person must own shares in the company which entitle the person to
share in the profits and take dividends.
Ordinary shares will generally give a right to not only dividends, but also voting and rights to share in any distribution in winding up.
Separate classes of shares can be created as you suggest (referred to as alphabet shares) and can carry restricted rights (ie dividend rights only), but this isn't quite as straightforward as it sounds. There are certain reporting obligations and tax considerations. Advice should be sought.
Good summary. Just to add that a shareholder bears the risk of running the business and partakes in the upturns but also the downturns whereas a payrolled FD would be on a fixed salary. Does this FD want to bear the risk of uncertain dividends to save some tax by not being PAYE?
I would not be giving someone shares in my business. By all means make them a director, but keep control of what you pay them.
If you give shares, then at some point you may want to buy them back - who knows how much for..
Stick to pounds and pence only.
Agreed- parting with shares now just makes more potential work for the next FD after the first one leaves.
Offer him a bonus based on results if you must (though not sure if he prepares the accounts I would want an incentive for him to distort), at least that is just re one year (subject to agreement) shares, like puppies, are not just for Christmas.
Do you and your fellow director have a plan for the rapidly growing (well done btw) business?
Do you want to keep growing organically, take over other businesses, sell to a larger firm, attract outside investors, float on the stock exchange? The team you will need around you will need different or at least relevant skills/experience to help you achieve that...
Might be just the way I've read this but I would be concerned about someone who has voiced his need for how he is paid to reduce his own tax bill, but who has not, by all accounts, convinced you as to how an FD can add value to your business.
Were I to consider working for you(*), I'd want to know my pay structure. As others have said, the pay structure is subject to PAYE. If you try to use dividends as part of pay for someone who is essentially your employee, then at least one of two things happens: the dividends are taxable as pay, because they're part of the employment contract; the shares awarded have a high value, which value is taxable as employment income.
I would say all of this is something you could talk about with the accountant, as (imho) you will still benefit from having an accountant even if you employ the person under discussion.
(*) I am referring to the company as "you". It's not. You are you, the company is another person.
For example, your accountant could advise you about EMI. That could be the ideal solution - emphasis on the could.
For example, your accountant would understand the tax position. If you have fairly represented what the new person has asked for, it doesn't sound like he does. (Emphasis on the if.)