Singing Pig

Hi everyone,

I am slowly getting my head around all to do with limited companies!. If a company is set up for arguments sake with two directors 80/20 share split. One is more a silent partner (20% share holding) and I have the other 80% share holding.

Let say for arguments sake I do one BMV via the company. Lets keep the figures round. Purchase price is 82k. Property sells for 100k. Profit after expenses say 12k. Now I want to withdraw 2k to put into my personal account.

1) Can I just go ahead and do this. Would all dividends payments be recorded at the end of the year? I guess the question is how do I extract money?

2) Can I just pay myself a dividend without paying share holder 2 a dividend.

3) Is a shareholder always entitled to share of the profit in proportion to their share holding- I assume so.

Apologies for the questions!

p.s

I am trying to involve a long standing associate in the company without hindering its long term profitability/functioning.

Thanks

Jon

Common sense tells me that if you want to extract money from your limited company then the directors can declare a dividend. This sum must be split equably between the shareholders in proportion to the number of shares that they own. I expect that a shareholder can agree to forgo his dividend, but it has to be offered in the first place. Tax will have to be paid on the declared company profit before such dividend moneys can be taken and I expect income tax must also be deducted from the payment before it is made.

If you are lucky, James Smith may post up some more authoritative suggestions.

P.P.

OK, some basics first.

All directors are equal, although your company's Articles (its rule book) could give one director a casting vote, so if you have two directors, you are both equally able to make decisions about the company.  Your shareholdings do not influence your powers as a director.  This is sometimes overlooked - if you don't want your co-director to have equal power to you, make sure your Articles give you casting vote, or better still, make the other person a company secretary and/or shareholder only and not give them the powers of a directorship - all you need is a disagreement in the future and the company can easily become damaged.

As for shareholdings, all shareholders of each class of shares are entitled to received their proportion of dividends.  So if you only issue ordinary shares, say 80:20 as you suggest, then your co-shareholder is entitled to their 20% share BUT they may waive it at their discretion - however you can't force them to do so.  It is probably better to arrange for their to be special classes of shares - for example "A" and "B" shares that carry no rights to voting nor capital distibution on winding up - you would have the "A" shares and your co-shareholder would have the "B" shares -  then the board of directors can vote a dividend only to "A" shares or "B" shares without issue (Although you come back to who has the power at board level to approve the dividend payment!!).

To pay a dividend, you need a board meeting to authorise it, so you need a written minute of the board meeting, and you also need to create a "dividend voucher" evidencing the payment, so no, you can't deal with it at the year end, the paperwork has to be done before the dividend is paid.

As for company tax, the payment of a dividend doesn't affect the company tax bill at all.  The company is liable to tax on the £12k profit (adjusted for any other taxable income or tax allowable expenses), payable 9 months after the company year end.  At low levels of profit, the corporation tax would be 19%.

From a personal point of view, there is no additional personal tax on receipt of a dividend, unless your total personal taxable income for the tax year exceeds the higher rate threshold.  The gross dividend (i.e. amount received divided by 0.9) is added to all your other taxable income in that year and any excess dividend above the higher rate tax threshold is taxed at a further 25% of the net dividend representing the excess over the higher rate threshold.  So if with your dividends, your total income stays under the HR threshold, no additional personal tax is due.

Hope that helps.

"Tax will have to be paid on the declared company profit before such dividend moneys can be taken"

Is that right?  So dividends cannot be paid until after the tax paid 9 months after year end?  Seems an awfully long time to wait.  I would have thought that in this case, as long as the corporate tax amount on the profits was calculated approximately a dividend could be paid based on estimated net profit.

Interesting that a director can refuse a dividend payment, I didn't know this.  Presumably, in the case of husband and non-working wife team, this could be used to extract company profits without taxing the higher-rate husband?  I know the IR are looking into this (following Arctic Systems case) and loophole will change next year but perhaps this technique can be used to it's full this year? 

E.g. Husband is higher rate tax payer, wife non-working (well, looking after family), both hold shares 50:50 in company.  Company pays dividend of £10K but husband refuses his due to the tax liability.  Wife keeps hers tax-free.

The alternative to the above is to re-allocate shares 99:1 in favour of wife, but I don't know if the IR would accept this as being valid unless it could be proved that wife was the main contributor to business.  Any thoughts?

Regards

Rob

Few points to clarify/clear up:

1. Dividends are in the % of share ownership, so if there is £12k profits this will be due in the ratio 80:20 although you can 'waiver' dividends if you do it right!

2. You can have directors loans for short term borrowing from the company. This isn't taxable if you stay within the limits.

3. Dividends can be declared at any time - BUT you must take into account the  Corporation tax before you work out the "distributable reserves" available from which you can declare a dividends. (Dividends come from profits retained after ALL costs including tax) - this doesn't mean you have to wait until the year end if you can work out what the tax will be.

4. Its up to you to decide the powers of the directors. 

5. Alphabet shares can work but there are lots of rules about this sort of thing. Ie its very much a "dont try this at home" area as is the husband/wife split issues.

Generally speaking if its anything to do with companies then do get proper advice upfront before you do anything as its easy to get into a muddle!

Hope that helps

Regards,
 

Thanks James.

One other question - can you backdate a share transfer, i.e. if I want to adjust the share ratio to be more in my wife's favour before a dividend was paid?

Regards

Rob

Rob, caught me online there.

You cant change when a share has been transferred. This is a matter of recorded fact.

I wouldn't however muck about with a company without proper advice, speak to your accountant BEFORE trying to do anything 'clever' or you might well find it turns out that you tried to push it too far.

Regards,