I wanted to run something passed you guys to see if I'm own the right wavelength for one of my clients.
I have a Ltd company with 2 shareholders/directors, they are attempting to decide what % of the profits they each should receive.
They both put the same amount of Capital in, although Director A has put more director loan money in. Director B is also running a seperate business as a sole trader, so his time is split between the two.
Director A believes a 60/40 split is fair in his favour due to the fact he does more work for the business as it is his sole focus. But director B is querying saying it should be based only on the amount of Capital put in.
This is not my strong point but I thought it would be dependant on the number of shares each hold, as the dividend is paid on the share holding and the type of shares. If both hold equal shares, the dividend will by default be the same for each.
I suppose the Director that does most of the work may be able to agree with the other to take a higher salary. Alternatively, if the money introduced to the company was a loan they could charge interest, which is more amicable if they put in different amounts.
I am sure somene else may have a different solution.
If they are struggling to agree this now, there may be trouble ahead.
By no means an expert, far from it and this is all opinion based, but I would of thought that a directors loan would have no bearing on percentage of shares which I would of thought was dependent on capital introduced, so therefore the shares should be equal, however the fact that one person puts more time into the business would mean to me that they deserve more of an income from said business. I did read somewhere about a hypothetical situation like this where the director with more hands on input did come to an arrangement where they took a higher wage before splitting the profit 50-50 which would seem to me a more amicable arrangement.
Agreed with above. The initial and subsequent capital introduced (ignoring shareholdings) has no bearing on the entitlement to profit shares.
The business is owned in relation to the type and quantity of shares issued and ultimately any dividends drawn will be allocated on this basis (barring any wavers etc).
I think your client needs to draw up a separate agreement whereby each director is entitled to a certain salary or bonus depending on profits / time spent etc. This agreement will be separate to the shareholdings and any moneys would need to be processed through the PAYE system.
Alternatively, I suppose, one shareholder could take a dividend at the year end (at an agreed amount) and the other shareholder could waver his right to this final Divi. If this is a route worth considering (to avoid the PAYE system) I recommend you take further advice.
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Forgive the typo's I generally do not proof read. Just lazy I guess!
Many thanks for your replies and advice on my post, it has clarified that their profits should be equal as they both have the same amount of shares. I will then suggest that Director A takes a higher salary, as they are both taking salaries at the moment.
I will see how they fair with this news !
I agree with you Bill ... it does make me a little cautious, but they have known each other a very long time in both business & pleasure !
I agree with many of the replies and goes to show how important it is to get agreement on issues before you start to trade.
Probably they thought to split 50:50 but when it came to it and one of them was able to do loess, the other thinks hang on a minute etc etc
This is where many Ltd's come to blows for not doing things properly and only have say 2 shares between the 2 Directors. Really they should have the number of shares equalling the amount of capital they introduce, which then makes life easier, although this cold also come a cropper if they agree otherwise.
Once you have the shareholding sorted, then you agree the salary structure, the one working more should obviously get paid more.....
I think they should keep the split 50:50 but change the salary structure or pay a bonus to Director A.
Just my extra tuppence worth as it may help with the logic: If you take the case of a consumer buying some shares in a company they have no other connection with, you can see that they should get their rightful dividend for the type/quantity of shares they hold.
The shareholders are the owners, whether they choose to work for the company or not, and dividends are split up pro-rata amongst the shareholders.
Many thanks for your replies and advice on my post, it has clarified that their profits should be equal as they both have the same amount of shares. I will then suggest that Director A takes a higher salary, as they are both taking salaries at the moment.
I will see how they fair with this news !
I agree with you Bill ... it does make me a little cautious, but they have known each other a very long time in both business & pleasure !
Thanks again
Lisa
It would also be a good idea to have either preference shares or separate ordinary share classes then dividends can be awarded accordingly. This is generally more tax efficient than awarding a bonus.
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