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Benefits to having a partner as director and shareholder, even though not acting as one or taking dividends!?

Benefits to having a partner as director and...

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Hi, I have a new client who set up his own limited company a few weeks ago. He has told me that there are 2 directors, himself and his girlfriend. He also has 2 shares and his girlfriend has 1 share. I asked him if there was any reason why he had included his girlfriend and he said a friend insisted that he should do it that way.

He is an project engineer consultant. His girlfriend has no part of the business and doesn't intend to have any either. Nor does she intend to receive a salary or any dividends from the company.

So my question is, what is the benefit of her being a director and a shareholder? I have never really thought there was any point but I have never really asked myself the question before.

Any comments would be much appreciated, thank you.

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By cheekychappy
17th Jun 2015 17:57

If she is a shareholder, what do you mean by she doesn't receive dividends?
Are they of a different class or are dividends not declared at all?

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By Manchester_man
17th Jun 2015 18:08

@Cheekychappy, As the company was only set up 2 weeks ago, I assume that no dividends have been voted yet and that whilst the client States that his girlfriend won't be taking salary or dividends, he doesn't really understand that if she is an ordinary shareholder, then the girlfriend will receive a share of any dividend voted.

@the OP, I cannot see any beneefit whatsoever, only complications such as the dividend issue mentioned by cheekychappie.

Madness to set up a company and structure it based on what a 'friend' says is 'the way to do it'.

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paddle steamer
By DJKL
17th Jun 2015 18:12

The only advantage  I can really see in having more than one director appears to be if he dies or becomes incapacitated, in the event of a company with no director/ secretary, and until title to the shares is established via the probate process or similar, there might be a bit of a limbo period.

For years I have acted as a second trustee re various trusts (now only one left) as my father had been  a trustee and his  business partner the other, when my father retired it was deemed prudent to have someone else in case his former partner became unable to act.

Whether the other director ought to be a shareholder is another matter, one for your client to consider re  assets/ break up in future/ what he wants etc. It is a lot easier to remove a director when owning all the shares than to dislodge a hostile fellow shareholder in the event of future problems.

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RLI
By lionofludesch
17th Jun 2015 18:12

At one time, you needed two directors - or a director and a secretary.

Now the one man (or woman) company is truly with us.

The benefits are more arguments in the Board room and at AGMs. 

More seriously, if we're talking about two shares of the same class, the girlfriend will the same dividends as he does - so if she's not going to get any, neither will he.

Obviously Dave-down-the-pub didn't ask any questions when he gave this advice. You need to talk through what your client requires and (more than likely - based on what you say) get the girlfriend to sell him her share and resign as a director.

But make him aware of the opportunities for income splitting.  Much depends (perhaps) on how close Miss Girlfriend is to being promoted/relegated to Mrs Client.

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By Ashlea
18th Jun 2015 10:05

Thank you for all your comments.

The dividends have the same share/voting rights, no difference what so ever.

The company is based solely upon the director running it as he is a specialist consultant. The girlfriend has no input into the business whatsoever and never will do. There isn't even a "role" that she could have within the business to justify any dividends or wage being paid to her, as we provide a particular service that includes raising invoices and regular financials (could be deemed as bookkeeping).

There is no income within the company at the moment, so I will advise my client to get her to resign as director and transfer her shares to him. As I had thought, there is no major benefit now or any time that I can foresee. Thank you again everyone!

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RLI
By lionofludesch
18th Jun 2015 10:15

Justify

She doesn't need a "role" to justify her dividend.  She just needs a share, which your client, rather foolishly, gave her, on the advice of Dave-down-the-pub.

Just saying .........

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Replying to Anonymous.:
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By louisVW4
19th Jun 2015 13:18

Justifiy

I agree, if the girlfriend is taking no active role in the company, and there is only one fee earner e.g. an IT consultant, then the only justification for granting shares, and hence ownership of the business, is to reflect the strength of the personal relationship between them.  

Picture the scenario a few years on!  

The Director granted 50% of the shares to his girlfriend because, at the time, he expected to stay in the relationship.  He pays a small amount in dividends to his girlfriend for a couple of years, but she doesn't understand if it's the right amount; she trusts him!  Unfortunately for the girlfriend, who took no active role in running the company, the Director has his head turned by another woman, and when the relationship with his girlfriend obviously turns sour, he decides he doesn't want the ex-girlfriend and owner of 50% of 'his' company (as he puts it) to continue receiving any profit from the company. After all, the company was billing £10K per month for the company's only contract, and he was the one generating the income.  The problem is, when they were happy, he granted her 50% of the business, so now needs it back.  He tries to persuade her to hand over her 50% of the shares for no value, but she gets suspicious and asks an accountant to look at it.  He advises her to seek a fair valuation for the shares and sell them to the director, but he says there is no value.  Stalemate ...and he's still on the hook for paying her 50% of the profits and any other distributable assets. 

How does he solve his problem?  He sets up a new company in his sole name, withdraws his services from the joint company, ends the sole contract and source of income for the joint company, and starts a new contract with the same client, doing the same work, but under a different company name.  He then makes his new wife Director of both companies, and the rather healthy shareholders funds balance in the joint company disappears. The new director then applies to have the joint company struck off.

Clever, eh?  Or can someone see a problem with this strategy?

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Replying to legerman:
By Tim Vane
22nd Jun 2015 09:01

Problem

louisVW4 wrote:

Clever, eh?  Or can someone see a problem with this strategy?

If he's only been paying a small amount in dividends then presumably the bulk of the cash for the last few years work is still in the old company and there is no way he can stop the girlfriend taking half of the reserves.

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Replying to legerman:
Stepurhan
By stepurhan
22nd Jun 2015 09:10

Further issues

louisVW4 wrote:
He then makes his new wife Director of both companies, and the rather healthy shareholders funds balance in the joint company disappears. The new director then applies to have the joint company struck off.
As 50% shareholder, the former girlfriend can block the appointment of the new wife. The shareholders funds balance does not disappear (as has already been pointed out) and I cannot see why you think it does. The old girlfriend is already on notice that her ex is up to something, so any attempt at striking off is unlikely to go unchallenged.
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Replying to bernard michael:
RLI
By lionofludesch
22nd Jun 2015 09:16

Agreed

stepurhan wrote:

The shareholders funds balance does not disappear .......

No - just the cash.

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Replying to bernard michael:
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By louisVW4
23rd Jun 2015 18:44

All rather late...

The former girlfriend didn't know about the appointment of the wife until it was too late, and didn't realise she could block the appointment anyway.

Yes, the cash has gone, and nobody will explain how, or provide the full accounts, even when officially requested by Companies House!  

The striking off has proceeded, even though Companies House was advised of the irregularities and pending legal action. They viewed the problem as a personal dispute in which they can't get involved, and would not wait until the funds were available to commence legal action.  

However, legal action has now commenced, albeit the company was dissolved this week.  I guess it can be reinstated for the action. 

Maybe justice will be served.

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Replying to Tax Dragon:
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By louisVW4
23rd Jun 2015 18:49

I probably shouldn't have posted this because...

...I know the director of the dissolved company will be reading this, and will be rushing to destroy all company records, such that she can claim in disclosure that she did not think she needed the records any more.  Unfortunately for her, she can't destroy records held by others.  We are coming after you. See you in court!

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By Tim Vane
18th Jun 2015 11:32

Maybe Dave down the pub is diddling the client's girlfriend behind his back and the two of them have cooked up this scheme to take advantage of the poor mug.

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RLI
By lionofludesch
18th Jun 2015 11:36

Possibly

Could be, Tim.  Could be.

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By Ashlea
19th Jun 2015 09:43

With reference to the comments above........ nice to see everyone is a touch pessimistic like me sometimes, although I would say its more realistic most of the time.

After all of this my client at the last minute remembers he forgot to tell me about their property portfolio (majority in her name solely) and plans to expand! Had his friend known this then they may have realised that his partner already has an ever increasing second income (rental) which will use most of her basic rate tax band and therefore negate any benefit of her being a shareholder receiving dividends which would have reduced his tax. Got to love clients!

So we are transferring the shares to him and she is resigning as director. Progress at last haha

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By Ashlea
19th Jun 2015 13:55

We advise most of our clients the most that they can withdrawn on a monthly basis so that only money for the company liabilities is left within the business account. So for that reason the most he would ever be vulnerable to losing is a third share of estimated dividends for one months work. Unless his partner was willing to withdraw the money for liabilities in which case that isn't his problem, its hers and HMRCs! So he can easily set up another company if he has no interest in keeping the company as a "brand/known" name. U

The same applied if he was to die and there was probate and time delays in deciding who the company should go to, the most money that his partner may be unable to access is only a months worth of basic salary and both their estimated dividends for that month. 

I did discuss all of the potential scenarios regardless of how unlikely they may be. However had I known about the properties then I would have saved myself this question and go over everything in detail with him. Although I am an avid lover of Accountancy and I must admit I enjoyed this question and answers, along with my client being happy knowing his Accountant takes time to go away and research the best advice.

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By JCresswellTax
19th Jun 2015 14:15

Settlements legislation

I am sure this arrangement would be caught under the above as the spouse exemption won't apply.

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By Tim Vane
24th Jun 2015 09:27

It's not worth getting the company involved at all - far too much hassle for a simple personal dispute.

Seems to me that this is just a clear case of theft perpetrated by one person on another - the capital realised from the company has been converted to cash and then stolen. Just make a simple claim for recovery of the relevant amount, as a direct claim against the other shareholder, in the same way as if he had made off with half of the money in their joint account. Not involving the company at all will make for a much simpler claim and will surely be easier to prove.

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By Ashlea
30th Jun 2015 13:32

Lucky that his girlfriend is no longer a director or shareholder now!

One less headache for me, the client and a solicitor haha

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By Gone Sailing
03rd Apr 2016 11:16

Press Reset

All the above just days before the July 2015 Budget.

Back to settlements.

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