Tax efficient company structure

Starting a new company with 2 others. We all currently have Ltd companies.

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I am planning to start a new company along with two others in the IT Consulting space. All three of us currently have our own Ltd companies and work for the same customer. We would like to join hands and start a new company (New Ltd.) and hire more people (1 to begin with) to offer services to the same customer and others in the future. 

We have the below requirements from the company structure.

  1. Flexibility to draw as dividends unequal earnings equalling to our individual billing to the customer (Indiv. Earn.): We all work different hours and have differnt billing rates and currently bill the customer through our Ltd companies and draw the money we need as dividends. We would like to have the same flexibility going forward. Can we have contracts with the New Ltd. and bill the New Ltd for our individual services? If not, what other options do we have.
  2. Tax efficient withdrawl of dividends from remaining profits (Sales - Indiv. Earn. - Employee Salaries - Other costs - Corp. Tax - Maintenance funds): We would like to draw the remaining profits from the company as dividends but not to us as individuals but to our Ltd. companies either the existing ones we currently have or new companies that we can setup. We are then planning to invest these funds individually into other different businesses. Can this be achieved by holding the share of the New Ltd. in our invidual Ltd. companies or would it be better to setup new companies for this?

We also looked at an LLP model with our existing Ltd companies as members and I heard conflicting views from the accountants I spoke to. One said it is ok to do this through an LLP, while the other said we would run into tax avoidance issues and potential IR35 issues. I am not sure if they apply to our setup, since we are not existing member of an LLP substituting our Ltd. for tax reasons but are setting a new LLP with our existing Ltd. companies as members.

 

 

Replies (21)

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VAT
By Jason Croke
12th Jun 2024 11:55

You will always get conflicting views from Accountants when you are fishing for free advice....because Accountants can't give specific advice unless you are a client, after AML checks have been done, etc.

So at best you'll get vague pointers which you could have just Googled, leaving you none the wiser, but if you want a precise answer then it needs to be paid for because that is what you are paying for, a precise answer to suit your specific needs.

Bit like using Google to check a rash you have, you'll be able to narrow down the problem to 2 or 3 things but for certainty you have to see a GP and that is where the GP beats the internet every time, certainty as to the issue and a bespoke medical solution based on everything the GP knows about you, one tablet might work for you but not for another patient.

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Replying to Jason Croke:
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By rkraccounting
12th Jun 2024 15:22

Thank you Jason. We are talking to the accountants who currently run our individual Ltd. companies, with the idea that they also pick up the new accounting work, so it is not completely free advice.

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Replying to rkraccounting:
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By FactChecker
12th Jun 2024 16:42

"We are talking to the accountants who currently run our individual Ltd. companies, with the idea that they also pick up the new accounting work, so it is not completely free advice."

You've missed, or not understood, Jason's point.

You and your colleagues are all IT consultants - you don't say in which sphere but let's say, for this example, that you are all specialists in Security.
If a new prospect came on the scene and mapped out a basic, high-level proposal for a new venture where security was paramount and merely "talked" to each of you in turn - without explaining the full rationale (and constraints) behind their plan let alone hiring anyone - would you be happy to provide thoughts and comments on their plan in an unpaid professional capacity?

If it then became plain that the prospect was picking & choosing ideas (that may not be viable or indeed complementary with each other) from these conversations in order to define its own Specification, would you and your colleagues (who are NOT at this point collaborators) be individually comfortable with that?
Indeed would the prospect be wise to do this, given that no single professional mind has given that Specification the imprimatur of being viable and optimal?

In other words, it's not the 'free' part that's the main issue - although it irks any professional to feel their knowledge isn't being respected. It's the fact that without being retained there is no incentive to spend the time necessary to understand all of the prospect's considerations and influencing factors - and so there's an increased likelihood of a major mistake (which may only become apparent several years downstream).

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Cherry
By cherrytelevision
12th Jun 2024 13:08

Unequal dividends can be achieved by having an A, B, C share structure.

If you wish to draw dividends to both the existing limited companies and yourselves then the existing limited companies will need to be shareholders of the new company. At this point, if not already, you will definitely need to hire an accountant.

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Replying to cherrytelevision:
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By rkraccounting
12th Jun 2024 15:51

Thank you, will explore this further and discuss with our accountant.

Is this a possibility?

Director A - 100% A shares, Director B - 100% B Shares, Director C - 100% C Shares
Ltds A, B, C - 100% D shares

We declare different dividends to each share class depending on what is agreed between the directors.

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By Tax Dragon
12th Jun 2024 14:03

1. Yes.
2. Yes.

But do you mind if I ask why? What problem is this all solving?

And of course Jason is right.

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Replying to Tax Dragon:
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By FactChecker
12th Jun 2024 14:20

Maybe they just like breeding companies ... after all they're easy enough to set up!

But in all seriousness, I couldn't get past "We all work different hours and have different billing rates" ...
... so no equality of contribution (before we get to shareholding let alone extraction).

Whatever the objective it's clear as mud at the moment ... yet another good reason for OP to heed Jason's comments.

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Replying to Tax Dragon:
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By rkraccounting
12th Jun 2024 15:27

Thank you for your reply.

The problem we are trying to solve is to extract the earnings proportional to our individual contributions. We will then be investing the dividends individually into other businesses that we operate separately such as Buy-to-Let for example.

Will an LLP structure work better for unequal share of earnings into our Ltd. companies that we currently have (the Ltd. companies will be members)

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Replying to rkraccounting:
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By Tax Dragon
12th Jun 2024 15:38

I understand.

I'm changing my answer to:

1. No; 2. Yes; and of course Jason is right.

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Replying to Tax Dragon:
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By rkraccounting
12th Jun 2024 15:50

thanks and the reason for the change in response if you don't mind?

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Replying to rkraccounting:
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By Tax Dragon
12th Jun 2024 16:00

I was uncomfortable with my first response, as I was trying to answer from the legal perspective (as per your tags) but I am not a lawyer. You probably need one of those, by the way.

I should have explained, sorry, but for my second response I was looking at it from the tax [advisor's] perspective. I'm much more comfortable with that. Here's an article which does simplify the analysis but provides some useful info. https://www.taxinsider.co.uk/can-directors-be-consultants-to-their-own-c...

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Replying to Tax Dragon:
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By rkraccounting
12th Jun 2024 16:42

Thank you. As first timers trying to run a business it is really hard to find the right accountants and solicitors. Appreciate any ideas on finding a good solicitor and is it corporate solicitor that we need to contact specifically?

Also what are your views on an LLP setup with the Ltd. companies as members. I have come to understand that unlike Ltd. companies there are less restrictions on unequal earning division in case of an LLP.

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Replying to rkraccounting:
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By Tax Dragon
12th Jun 2024 17:00

A good advisor is one who knows and admits to their limitations.

I would address your LLP question to the lawyer.

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paddle steamer
By DJKL
12th Jun 2024 15:10

Could consider a Me Tarzan you JANE agreement/structure to stop creating new beasties (especially if one or other existing entities already runs a payroll.)

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Replying to DJKL:
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By rkraccounting
12th Jun 2024 15:49

Thank you for the reply.

How would this work? Any reference links that I can refer to if it is too long an explanation.

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Replying to rkraccounting:
paddle steamer
By DJKL
12th Jun 2024 18:03

A JANE is a mere contractual relationship amongst the parties rather than a new legal entity itself. (JOINT AGREEMENT NOT ENTITIES)

https://www.arnoldhill.co.uk/blog/news/joint-agreement-not-entities-jane....

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By paul.benny
12th Jun 2024 17:14

You talk of extracting returns in proportion to your contributions. That’s fine if you’re just measuring "contribution" on the basis of billing. But what about time spent on business development? What if I bring in the client but you bill most of the work, how does the profit get split? How do you apportion the profit earned by employees? Do you split the overheads equally three ways or by some other measure? Etc. These are solvable if you agree up front, less so if you wait until they are a point of contention.

There’s a whole lot of stuff alongside tax-optimisation. As Tax Dragon asks, what are you hoping to achieve by this structure that is not only complex but offers plenty of scope for falling out.

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Replying to paul.benny:
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By rkraccounting
12th Jun 2024 18:14

Every task will have a corresponding remuneration attached to it and will be distributed accordingly. Profits after deducting all the contribution based revenue will be distributed equally. Overheads will be split equally.

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Replying to rkraccounting:
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By paul.benny
12th Jun 2024 19:19

@OP - you're somewhat missing the point. I'm not advising, so I'm not interested in your answers - although I do note that they gloss over the more complex issues such as who owns the profit earned by your employee(s). And btw, having employees hugely adds to cost and complexity (payroll, autoenrolment, EL insurance, etc) - all of which require management.

The only answer of relevance is what you hope to achieve by this plan. All too often people come with a pre-formed solution seeking advice on how to make it work, when it's often simply the wrong solution.

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By Martin B
12th Jun 2024 17:19

Best make not to make a change and carry on with your individual companies and keep what you each earn. Job done.

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By Matrix
12th Jun 2024 17:29

Ignoring IR35 and, in fact, all taxes since I don’t know the facts, I would set this up as a new joint venture. I have no idea why you would want your day rate to be paid to a company where you hold a minority interest.

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