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Company formation - money introduced

How to deal with money introduced to a new ltd company

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Hi folks,

Ive got a client wanting to form a new limited company.  2 of the people involved are straightforward, both directors and shareholders, so lets call them director A and B, and Shareholder A & B.  The third guy doesnt want to be a director, but wants his already formed company to be a shareholder in the new one, lets call this limited company shareholder C.

Director/Shareholder A is putting in £50,000, B is putting in £75,000, and shareholder C (not a director) is putting in £25,000.  Normally in companies I have formed in the past when all the shareholders are directors, I would probably have just have suggested allocating the shares in the ratio of 25:50:75, making 150 shares in total, and then put the money introduced to each directors loan account.  However in this instance the company introducing £25,000 is not going to be a director.

Would it be then that the procedure would be to allocate 150,000 shares in the above ratios and therefore have 150,000 paid up shares and no money in the directors loan account?  This would seem like a bad idea to tie up that money in share capital.

Or is there a different way to do this?  This is the first time I have come across this kind of scenario, so any help would be appreciated!



Replies (5)

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By johngroganjga
09th Sep 2019 13:02

It’s not for you to get involved in how the shareholders should distribute ownership of the shares amongst themselves.

If they are putting in more cash than the issue price of their shares, ask them what the excess is. It is difficult to imagine that the excess could be anything but a loan, and if that is what they say you have your answer. Job done.

Thanks (1)
By paul.benny
09th Sep 2019 13:06

Start at the beginning.

What is the agreement between the parties? In the arrangement you describe, C has almost no influence, yet is putting in £25,000.

Get the parties to thrash how this thing is going to work - who makes the decisions, how decisions are made, how they are going to get a return on their investment, how they resolve disagreements, how anyone exits.

Then get it documented by a lawyer.

And then do the accounting for the investments.

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By WhichTyler
09th Sep 2019 13:25

+1 for what Paul Benny says

one hint though: it is possible for companies to borrow money from people who are not its directors...

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By AnnAccountant
09th Sep 2019 14:05

What is being a director got to do with it? And why should money introduced as loans rather than share capital influence ones shareholding?

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By lionofludesch
09th Sep 2019 14:55

Have you thought about passing this case to a colleague who knows what he's doing?

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