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Dividends for Directors with different share classes

Dividends for Directors with different share...

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Ok, so my first time on the forum, play nice! I have recently formed a Ltd company in the UK with a colleague of mine. The two of us are the only people in the company, 4 £1 shares, 2 shares each. When paying out dividends, each current class of share must receive the same dividend, correct? What we would like to be able to do, is weight dividend payouts so contributions to projects can be translated into dividends. I have spoken with an accountant who I will be using for our end of year accounts. They have stated, creating a second class of share would allow us to be paid different amounts in terms of the dividend payouts. Are we able to reduce the value of the current share class to a very low figure, and then use the new class of shares that we can use to adapt to our situation? I just want to make sure everything is set in place from the beginning. Sorry I'm not up to speed with all the technical terms. I appreciate any help and corrections!  

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By Anonymous
05th Sep 2009 15:35

Perhaps you should find an accountant you trust.
All shares within the same class rank equally for dividend. Thus if you wish to pay a different dividend to each member then each member must hold a different class of share. Simples!

You would pass a resolution to create a new class of share and then one of you would do a share for share exchange.

If you treat dividends as a way of rewarding members for the work they do rather then as a return on their investment please do not be surprised if HMRC try to do the same.

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By zebaa
05th Sep 2009 16:14

Open to challenge

The problem with your proposal is you may find it challenged by HMRC somewhere down the line. This may be a couple of years from now but they would look to recover any tax lost, plus interest. There could be other costs too. Forming a couple of companies as an alternative also presents problems with ir35.

One solution would be to hold shares in proportion to the input value of the person. The problem with this is control: the minor shareholder has little control. In addition if someone does not put their weight then it becomes a huge problem. 

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By Anonymous
05th Sep 2009 22:18

what type of projects will the company be doing?

The best way to deal with this one is probably to create two further share classes. Make the existing ones A shares which may never need a di9vidend but create B shares and C shares. one of you will subscribe to the B shares and the other to the C shares.  ( But have the shares created and t5he resolutions drawn up by a specialist  such as David Venus who are qualified Companty secretaries.

 

As there may well be a dispute between you at some future time as to the contributions you are each making I would also suggest you get a solicitor experienced in commercial matters to draw up a shareholder agreement while you aere still on good terms with each other.

 

Mr seen it all before

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By novicedirector
06th Sep 2009 20:01

many thanks for the replies

The accountant comes highly recommended from a friend of mine who has a high business turnover, and has been able to help him on a number of levels. The company provides architectural support services: CAD drawing, visualisations etc. So, from what I can gather, creating the different classes of shares (if set up and administered by people who know what they are doing) B and C, each subscribed to by one of the two directors, will allow us to make dividend payments for each director. Can the separate classes of shares be varied each time in terms of their value or are they set in stone when you create them? And one of the comments stated I might have problems in terms of rewarding directors for contributions - you mean they would see it as a bonus and tax it accordingly, rather than, as you said , a return on investment? I'm hearing from my accountant next week, so I really appreciate all the info from you all. It's great to be able to have some kind of an understanding before I enter into the unknown!  

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By Anonymous
06th Sep 2009 20:39

Think about what happens when either one of you want to leave th

or whether you will always want to pay out all available after tax profits as dividend.  One of the reasons for trading as a company is that money not required for living can be retained in the company especially if the high forthcoming tax rates for personal income exceeding £150K start next year. Selling out eventially at much lower Capital gains tax Rates could in the vright circuimstances bre an attractive proposition.

 

However please do not lose sight of the benefits of paying reasonable salaries and building up a decent second state pension. Also, in view of the personal nature of much of the work it could be advisable to insure against long term sickness. It is my understanding  that dividends cannot be taken into account when taking out or claiming on such insurance. As the maximum that such insurance( including state incapacity benefit) can be for is 75% of self employed or salaried income ask yourself whether you can afford the risk of not taking sufficient of your income as salary. I know that such claims are fairly rare but even in my small practice I have had more than one client very glad to have a decent non taxable income after being on such insurance benefits for 15 or 20 years up to state retirement age.

Mr seen it all before

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By novicedirector
07th Sep 2009 06:19

thanks for the info

I will definitely take what you have said on board. I think it is important to think about the insurance side of things as well as a pension, and how we will handle profits in the future. If my personal income can get near to 150k I would be happy to have the problem of whether to leave the extra money in the company or not! I appreciate the advice.  

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By novicedirector
07th Sep 2009 06:19

thanks for the info

I will definitely take what you have said on board. I think it is important to think about the insurance side of things as well as a pension, and how we will handle profits in the future. If my personal income can get near to 150k I would be happy to have the problem of whether to leave the extra money in the company or not! I appreciate the advice.  

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By novicedirector
07th Sep 2009 06:19

thanks for the info

I will definitely take what you have said on board. I think it is important to think about the insurance side of things as well as a pension, and how we will handle profits in the future. If my personal income can get near to 150k I would be happy to have the problem of whether to leave the extra money in the company or not! I appreciate the advice.  

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By novicedirector
07th Sep 2009 06:20

thanks for the info

I will definitely take what you have said on board. I think it is important to think about the insurance side of things as well as a pension, and how we will handle profits in the future. If my personal income can get near to 150k I would be happy to have the problem of whether to leave the extra money in the company or not! I appreciate the advice.    

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By jamesashburton
07th Sep 2009 16:14

Two classes

I don't see whay you can't split the share capital into A & B shares with one of you transferring your existing shares to the "A" class and one to the "B". All it takes is a resolution. You are doing it for sound commercial reasons and there would seem to be no improved tax benefit to the individual shareholders so whilst HMRC could be difficult I don't see why it can't be done. Lots of people have. I've recently done this for an offshore company one of whose shareholders in UK resident (he wasn't when the company was set up) and HMRC rubber stamped it when we told them about it.

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By Anonymous
07th Sep 2009 16:37

ok

how about providing a copy of the resolution but ommitting names or other identifying marks. It isn't just HMRC that are concerned but the appropriate documentation has to be filed at COMPANIES hOUSE.

 

Mr seen it all before

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By jamesashburton
07th Sep 2009 18:01

Pardon?

What's all this about?

"how about providing a copy of the resolution but ommitting names or other identifying marks. It isn't just HMRC that are concerned but the appropriate documentation has to be filed at COMPANIES hOUSE."

I would like to think people would know that the info on the resolution has to go to CH. You also have to file a return setting out the changes.

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By Anonymous
07th Sep 2009 22:35

James

you may think its obvious but the originator of the stream admitted he was a bit raw.

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