Business Partner Needs A Wage, I Don't
Discussion
I am likely starting a business with someone I've known and worked with for a while, I already run my own business and he has always worked for someone else. I have another business to support me but he doesn't so he will need a wage as soon as the company is able to pay a wage (should be fairly soon for a very basic wage). The plan is 50/50 ownership.
How do people recommend to keep this fair if he needs a wage? I can't deny him of it, but I don't need it and I doubt we'll be able to pay out 2 x identical wages for a while. Even when we can, our plan is to reinvest as much as possible to push the company further, I don't really intend on taking any money from this company for a long while, if possible.
So how will this work if he's taking a wage and I'm not being paid anything? Is there a way to keep this fair? Could it be taken as directors loan? Should I allow the first £10,500 (personal allowance as PAYE) to go his way and not worry about it as he will be doing more work in the company than me?
He will also need a vehicle so the company will need to provide a van/insurance/servicing/fuel. I have a car so don't require any transport either.
How do people recommend to keep this fair if he needs a wage? I can't deny him of it, but I don't need it and I doubt we'll be able to pay out 2 x identical wages for a while. Even when we can, our plan is to reinvest as much as possible to push the company further, I don't really intend on taking any money from this company for a long while, if possible.
So how will this work if he's taking a wage and I'm not being paid anything? Is there a way to keep this fair? Could it be taken as directors loan? Should I allow the first £10,500 (personal allowance as PAYE) to go his way and not worry about it as he will be doing more work in the company than me?
He will also need a vehicle so the company will need to provide a van/insurance/servicing/fuel. I have a car so don't require any transport either.
Edited by MrSparks on Thursday 16th April 21:17
You can set up two class of shares so you can take out differing amounts of dividends - so that's technically how you achieve that part.
Can you work out how many hours each of you expect to put into the business and then work out a salary ratio based on that?
Or if you're happy not to take a wage then you can always forfeit your salary/dividend?
Or have dividends issued to you but don't take them out of the company - I think you'd then be able to issue the money back to the company in the form of a directors loan.
Can you work out how many hours each of you expect to put into the business and then work out a salary ratio based on that?
Or if you're happy not to take a wage then you can always forfeit your salary/dividend?
Or have dividends issued to you but don't take them out of the company - I think you'd then be able to issue the money back to the company in the form of a directors loan.
How about you each have a 50% share in the profits after wages are paid, but for the time being the profits stay in the company and are re-invested. So that leaves the wages. Decide an hourly rate, and you each get paid that. You leave your money in the company, and it is shown in the accounts in whatever way accountants do that. He takes his. You take yours out at some point in the future.
As for the vehicle, you do that just like you would if he was a normal employee, the value of it for personal use is allowed for in setting his wages, and he pays the appropriate benefit in kind tax out of his wages.
As for the vehicle, you do that just like you would if he was a normal employee, the value of it for personal use is allowed for in setting his wages, and he pays the appropriate benefit in kind tax out of his wages.
I would probably pay myself a director's loan each month equal to the value of his salary so that when the time comes and the company has enough money then you can draw down on it in a lump sum.
That way you each have the same payments being paid out to you which I would hope avoids disputes further down the line about 50/50 ownership etc
That way you each have the same payments being paid out to you which I would hope avoids disputes further down the line about 50/50 ownership etc
Be careful with building up balances on a director's loan. If you draw money from a company, HMRC does not like this to be shown as a loan to a director. Balances over £10,000 will create a taxable Benefit in Kind charge - if the company is not charging a commercial rate of interest for the loan it is giving to the director.
Also, there are Corporation Tax and Companies Act rules that either prohibit such loans or make it very expensive tax wise to do this.
The suggestion of having different types of shares for the differing shareholders can work but it does mean you are creating different status of shareholders, which may be detrimental and cause arguments in the future. Also, HMRC do not like what they call "alphabet shareholdings" as they will sometimes perceive this at an attempt on tax avoidance - and can and will (on occasions) seek to block such arrangements.
You need professional advice from your accountant.
Also, there are Corporation Tax and Companies Act rules that either prohibit such loans or make it very expensive tax wise to do this.
The suggestion of having different types of shares for the differing shareholders can work but it does mean you are creating different status of shareholders, which may be detrimental and cause arguments in the future. Also, HMRC do not like what they call "alphabet shareholdings" as they will sometimes perceive this at an attempt on tax avoidance - and can and will (on occasions) seek to block such arrangements.
You need professional advice from your accountant.
Eric Mc said:
Be careful with building up balances on a director's loan. If you draw money from a company, HMRC does not like this to be shown as a loan to a director. Balances over £10,000 will create a taxable Benefit in Kind charge - if the company is not charging a commercial rate of interest for the loan it is giving to the director.
Also, there are Corporation Tax and Companies Act rules that either prohibit such loans or make it very expensive tax wise to do this.
The suggestion of having different types of shares for the differing shareholders can work but it does mean you are creating different status of shareholders, which may be detrimental and cause arguments in the future. Also, HMRC do not like what they call "alphabet shareholdings" as they will sometimes perceive this at an attempt on tax avoidance - and can and will (on occasions) seek to block such arrangements.
You need professional advice from your accountant.
Not sure I follow the first bit. The loan will be from the director to the company. ie. the company owes the director, not the other way round. I can't see how this is a BIK?Also, there are Corporation Tax and Companies Act rules that either prohibit such loans or make it very expensive tax wise to do this.
The suggestion of having different types of shares for the differing shareholders can work but it does mean you are creating different status of shareholders, which may be detrimental and cause arguments in the future. Also, HMRC do not like what they call "alphabet shareholdings" as they will sometimes perceive this at an attempt on tax avoidance - and can and will (on occasions) seek to block such arrangements.
You need professional advice from your accountant.
I am not aware of any specific tax issues, From a company point of view isn't like any other loan the company has received. From a director point of view it does implication though I think.
fwiw, at the advice of my accountant, I "pay" myself from my company via my directors loan account. ie each year my accountant declares to HMRC that my company has paid me a nominal salary. That sum is put on the directors loan and the company pays off that loan to me as and when it can afford it.
The bad news is that, for personal tax, I have officially received that salary, regardless of whether the company has actually paid it to me or not. The good news is that I can be flexible with cashflow in the company as I don't actually need the regular income. I also don't need to mess around with monthly PAYE.
The relevence to the original question is that, during the first couple of years, the company could not afford my salary so that just built up the loan account. Now the company can afford it, I can now withdraw what I like (up to the balance of the account), when I like as a loan replayment.
I guess I could also charge the company interest on that loan but I don't (and I don't know what the implications of doing so would be).
I don't see why this cannot be done in this case, ie pay both directors but only one actually takes the money out of the company, the other allows the company to retain the cash as a loan.
but I am no accountant and it will at the very least affect your personal tax (which I guess is relevent if you have other income?) so talk to your accountant......
Interesting subject. I'm going to need to either take on an employee or a working partner in the next few months, and of the two, I'd rather have a partner. I know partnerships can be fraught but I think the difficulties can be minimised with care and suitable legal advice and written agreements.
brman said:
Not sure I follow the first bit. The loan will be from the director to the company. ie. the company owes the director, not the other way round. I can't see how this is a BIK?
I am not aware of any specific tax issues, From a company point of view isn't like any other loan the company has received. From a director point of view it does implication though I think.
fwiw, at the advice of my accountant, I "pay" myself from my company via my directors loan account. ie each year my accountant declares to HMRC that my company has paid me a nominal salary. That sum is put on the directors loan and the company pays off that loan to me as and when it can afford it.
The bad news is that, for personal tax, I have officially received that salary, regardless of whether the company has actually paid it to me or not. The good news is that I can be flexible with cashflow in the company as I don't actually need the regular income. I also don't need to mess around with monthly PAYE.
The relevence to the original question is that, during the first couple of years, the company could not afford my salary so that just built up the loan account. Now the company can afford it, I can now withdraw what I like (up to the balance of the account), when I like as a loan replayment.
I guess I could also charge the company interest on that loan but I don't (and I don't know what the implications of doing so would be).
I don't see why this cannot be done in this case, ie pay both directors but only one actually takes the money out of the company, the other allows the company to retain the cash as a loan.
but I am no accountant and it will at the very least affect your personal tax (which I guess is relevant if you have other income?) so talk to your accountant......
If you physically draw cash from your company during the year but do not treat this cash as salary or dividend at teh time the cash was drawn, you are effectively borrowing from your own company i.e. you owe that money back to the company. At a later date, you can clear that loan by declaring a salary and/or dividends to the value of the loan you had. BUT WHILST THE LOAN REMAINED OUTSTANDING, you could still be liable to a taxable BIK charge - unless:I am not aware of any specific tax issues, From a company point of view isn't like any other loan the company has received. From a director point of view it does implication though I think.
fwiw, at the advice of my accountant, I "pay" myself from my company via my directors loan account. ie each year my accountant declares to HMRC that my company has paid me a nominal salary. That sum is put on the directors loan and the company pays off that loan to me as and when it can afford it.
The bad news is that, for personal tax, I have officially received that salary, regardless of whether the company has actually paid it to me or not. The good news is that I can be flexible with cashflow in the company as I don't actually need the regular income. I also don't need to mess around with monthly PAYE.
The relevence to the original question is that, during the first couple of years, the company could not afford my salary so that just built up the loan account. Now the company can afford it, I can now withdraw what I like (up to the balance of the account), when I like as a loan replayment.
I guess I could also charge the company interest on that loan but I don't (and I don't know what the implications of doing so would be).
I don't see why this cannot be done in this case, ie pay both directors but only one actually takes the money out of the company, the other allows the company to retain the cash as a loan.
but I am no accountant and it will at the very least affect your personal tax (which I guess is relevant if you have other income?) so talk to your accountant......
a) the loan never exceeded £10,000
b) the company charged you interest at a commercial rate.
If you did not clear the loan within 9 months of the end of the company's financial year end, the COMPANY has to pay a penalty Corporation Tax charge on the balance of the loan as at the year end date.
You need to be aware of the taxation (and legal) impacts of such a scenario.
If you physically put cash or other assets INTO the company then the company owes YOU the money. HMRC has no problem with this - although they might be curious as to where any such cash came from in the first place.
Another way of building up a "friendly" balance on the loan account is to process a salary for yourself not NOT draw the cash out.
Edited by Eric Mc on Friday 17th April 16:11
Eric Mc said:
Another way of building up a "friendly" balance on the loan account is to process a salary for yourself not NOT draw the cash out.
Which was my point. No BIK because the OP is not wanting to take a loan from the company. it is the other way round......Edited by Eric Mc on Friday 17th April 16:11
In most small businesses, my own included, it's very difficult to separate your different roles as a worker, an investor, a shareholder, being the provider of the initial great idea if there is one, etc
That's why there are very blurred lines between what's appropriate to take as a divi and what you take as a salary (i.e. how you decide to take your income out), especially as it's influenced by tax advantages too
But when you have a partner and you don't have identical roles, you need to start discussing those types of things
In a very large publicly listed company, those roles are much simpler to identify - senior directors are still employees who earn a renumeration package, who might also have a small shareholding. Surely you need to look at your business the same way
If your partner is going to be doing more work in the business, which you suggest is the case, it seems perfectly reasonable to me that he/she takes a wage whilst you don't, after which you both, when the time is right, take a divi. Wages are for working in the business after all, divis are for you both as owners of the business to take out profit
If you have put more money in, then it may also be appropriate for you to have a larger share of the business. If you don't want to lose the equal voting rights arrangement, then that's where 2 classes of share can come in useful
That's why there are very blurred lines between what's appropriate to take as a divi and what you take as a salary (i.e. how you decide to take your income out), especially as it's influenced by tax advantages too
But when you have a partner and you don't have identical roles, you need to start discussing those types of things
In a very large publicly listed company, those roles are much simpler to identify - senior directors are still employees who earn a renumeration package, who might also have a small shareholding. Surely you need to look at your business the same way
If your partner is going to be doing more work in the business, which you suggest is the case, it seems perfectly reasonable to me that he/she takes a wage whilst you don't, after which you both, when the time is right, take a divi. Wages are for working in the business after all, divis are for you both as owners of the business to take out profit
If you have put more money in, then it may also be appropriate for you to have a larger share of the business. If you don't want to lose the equal voting rights arrangement, then that's where 2 classes of share can come in useful
jonby said:
In most small businesses, my own included, it's very difficult to separate your different roles as a worker, an investor, a shareholder, being the provider of the initial great idea if there is one, etc
That's why there are very blurred lines between what's appropriate to take as a divi and what you take as a salary (i.e. how you decide to take your income out), especially as it's influenced by tax advantages too
But when you have a partner and you don't have identical roles, you need to start discussing those types of things
In a very large publicly listed company, those roles are much simpler to identify - senior directors are still employees who earn a renumeration package, who might also have a small shareholding. Surely you need to look at your business the same way
If your partner is going to be doing more work in the business, which you suggest is the case, it seems perfectly reasonable to me that he/she takes a wage whilst you don't, after which you both, when the time is right, take a divi. Wages are for working in the business after all, divis are for you both as owners of the business to take out profit
If you have put more money in, then it may also be appropriate for you to have a larger share of the business. If you don't want to lose the equal voting rights arrangement, then that's where 2 classes of share can come in useful
Great response thank you!!!That's why there are very blurred lines between what's appropriate to take as a divi and what you take as a salary (i.e. how you decide to take your income out), especially as it's influenced by tax advantages too
But when you have a partner and you don't have identical roles, you need to start discussing those types of things
In a very large publicly listed company, those roles are much simpler to identify - senior directors are still employees who earn a renumeration package, who might also have a small shareholding. Surely you need to look at your business the same way
If your partner is going to be doing more work in the business, which you suggest is the case, it seems perfectly reasonable to me that he/she takes a wage whilst you don't, after which you both, when the time is right, take a divi. Wages are for working in the business after all, divis are for you both as owners of the business to take out profit
If you have put more money in, then it may also be appropriate for you to have a larger share of the business. If you don't want to lose the equal voting rights arrangement, then that's where 2 classes of share can come in useful
I may be putting some up front money in, he will be working more "hours" and as you say wages are for working, I am quite happy to accept that he should be entitled to a pre-determined minimum wage, so maybe we need to look to do a slightly different share holding and an agreement that states all the time he is working full time and I'm not, that he is entitled to a basic wage of X amount.
We will get proper advice before anything is final, I just wanted to get a few ideas/methods to think about whilst we start the planning etc.
MrSparks said:
jonby said:
In most small businesses, my own included, it's very difficult to separate your different roles as a worker, an investor, a shareholder, being the provider of the initial great idea if there is one, etc
That's why there are very blurred lines between what's appropriate to take as a divi and what you take as a salary (i.e. how you decide to take your income out), especially as it's influenced by tax advantages too
But when you have a partner and you don't have identical roles, you need to start discussing those types of things
In a very large publicly listed company, those roles are much simpler to identify - senior directors are still employees who earn a renumeration package, who might also have a small shareholding. Surely you need to look at your business the same way
If your partner is going to be doing more work in the business, which you suggest is the case, it seems perfectly reasonable to me that he/she takes a wage whilst you don't, after which you both, when the time is right, take a divi. Wages are for working in the business after all, divis are for you both as owners of the business to take out profit
If you have put more money in, then it may also be appropriate for you to have a larger share of the business. If you don't want to lose the equal voting rights arrangement, then that's where 2 classes of share can come in useful
Great response thank you!!!That's why there are very blurred lines between what's appropriate to take as a divi and what you take as a salary (i.e. how you decide to take your income out), especially as it's influenced by tax advantages too
But when you have a partner and you don't have identical roles, you need to start discussing those types of things
In a very large publicly listed company, those roles are much simpler to identify - senior directors are still employees who earn a renumeration package, who might also have a small shareholding. Surely you need to look at your business the same way
If your partner is going to be doing more work in the business, which you suggest is the case, it seems perfectly reasonable to me that he/she takes a wage whilst you don't, after which you both, when the time is right, take a divi. Wages are for working in the business after all, divis are for you both as owners of the business to take out profit
If you have put more money in, then it may also be appropriate for you to have a larger share of the business. If you don't want to lose the equal voting rights arrangement, then that's where 2 classes of share can come in useful
I may be putting some up front money in, he will be working more "hours" and as you say wages are for working, I am quite happy to accept that he should be entitled to a pre-determined minimum wage, so maybe we need to look to do a slightly different share holding and an agreement that states all the time he is working full time and I'm not, that he is entitled to a basic wage of X amount.
We will get proper advice before anything is final, I just wanted to get a few ideas/methods to think about whilst we start the planning etc.
Eric Mc said:
If you are putting in more money, in what way would that "investment" be shown i.e. in the form of additional shares or as a larger loan account?
Loan account I should imagine. We haven't fully worked out how much up front we'll need, we aren't talking a massive amount, probably only about £10,000. Also going to look to see if they still do any form of start up loan or grant for new businesses. Whilst I don't need a wage at the minute, I haven't got stacks of cash ready to lend a new company either.
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