I expect most people on this forum know this already, but I'd just like to add something that might not be obvious to everyone, which is that dividends are paid to people only in their role of shareholders. Someone may happen to be a director of a company as well as a shareholder in that company, but that is not relevant to the dividend they get, which depends only on the number and class of shares that they own.
I am pretty sure it's possible to pay unequal salaries to directors, so long as the shareholders' agreement when the company was set up does not specify equal salaries.
-- Edited by chatcat on Thursday 25th of July 2013 11:24:13 AM
I work for a limited company which has two directors who own 50% each of the business. However, one director works full time in the business whilst the other director doesn't work in the business at all. Therefore at the end of the year, they require the dividends to reflect this which would mean that one director has a much larger dividend than the other. Can that be done?
If there is one class of share and each director owns 50% of that class of share then the dusribution would be equal.
To change the distribution the directors would need to have different classes of shares both with equal voting rights so that the one directors holding is not diluted but one with less right to distributions that the other.
As an example
ordinary shares type (a) has a right to a dividend
ordinary share type (b) has no right to receieve a dividend
There are 100 of share type (a) in issue.
Currently each director hold 50 share type (a)
Issue 100 share type (b)
The two directors now each hold 25% of the share capital but between them they own 100% of the share capital not still held by the company itself.
Get director (b) to exchange (say) 40 of his dividend baring shares for shares type (b) with no right to a distribution but with equal voting rights.
There si no dilution of ownership but now there are only 60 shares of type (a) held by the two directors with uneven distribution of the class of share.
The dividend is distributed 5/6 to the working director with only type (a) shares and 1/6 to the director with only 20% of their holding being type (a) shares and the remainder being type (b) non dividend baring shares.
Tah da. different dividends but both directors still own the same percentages of the company.
HTH,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
yes, you are completely right. salaries have no reference to anything beyond internal agreement.
Also bonuses based on performance would be another way of fair allocation.
Of course dividends remain in most cases the most tax efficient means of making distributions for those with options between salaries, dividends and bonuses.
There are of course other options such as Pension contributions but I find that directors invariably want to see immediate results, not a better lifestyle 30 years down the road.
kind regards,
Shaun,
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
an alternative approach to there being 200 shares would be to reduce the initial shares from 100 to 60 shares and issue a new class of shares where there are 40 shares in the class (percentages used for example only).
Director 1 keepes their 50 dividend baring shares.
Director 2 exchanges 40 shares whch are being called in for 40 new non dividend baring shares (and retains 10 dividend bearing shares).
The advantage of this method is its easier to get ones head around that the pie is 100% and one can see how its divdeded up easily rather than the pie being twice the size of the shares within it with actual ownership.
Its not actually as difficult as it sounds but it does make the wording of the annual return more complex when you are stating long hand the share types in existance.
Does the business have a seperate accountant as, as this is probably a little more complex than you had initially envisaged, they would be able to sort all this out for you.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
The company doesn't have an accountant no. I am a qualified accountant but I qualified in 1995 and have been working previously in the public sector so apart from touching on shares and dividends in my studies all this is new to me. I have often said that it would be useful to use the services an accountant who works in private practice to run things by just to ensure that things are as they should be. I think areas such as dividends, tax etc are specialised areas and accountants often need to refer to their tax specialists to answer questions posed by their clients. In addition the rules are forever changing which an accountant in private practice will be aware of. I may raise this as a sensible idea again.
It sounds as though you have the right foundations Catherine but just need your skills to be used a little to bring them back to the fore.
I know that there are some things that I've passed exams in only recently where I read them now and think "Now how the hell do you do that" (I come from banking but still find financial instruments a nightmare).
Are you a member of a professional body? If not have you considered IFA or AIA as they have networks of accountants and it becomes much easier to get freindly advice rather than having to phone accountants who will first be looking at how much you can pay for their time.
On the things forever changing front I find it a good idea to read the Melville book on taxation every year. Its not dark side tax but rather a good intermediate book with lots of practice questions that keeps you abreast of tax changes.
For financial reporting standards read the study text for ACCA paper F8 each year.
Right thats just spent £75 of your money and two months of your time but, you will always be abreast of current tax and financial reporting standards.
Throughout the rest of the year subscribe to Financial Directors newsletter and Accountancy Age and the the Accounting Web newssheet and ACCA in practice and that keeps you up to date with everything thats happening plus has interesting discussions on technical issues.
The other benefit of that lot is that it all counts towards CPD for whichever body you are with / join.
Give it a couple of years and whilst you will never ever know everything you will be a lot more confident at offering a more well rounded service to your clients including advice such as that in this thread (although you may want to eventually migrate from ACCA paper F8 study to ACCA paper P2)
HTH,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thankyou so much for all that information Shaun - I was a member of ACCA as that was my qualifying body but I lapsed my subscription when I was working in the public sector as I never read the monthly newsletters as they weren't really relevant. I'm now a member of the IAB but that's merely book-keeping. I do need my CPD hours tho and personally I will feel much more confident if I keep myself up to date so I will definitely be following your advice regarding reading material. Huge thanks!
My only question regarding the above proposal is, will HMRC not see the change of share structure as an attempt to evade income tax/NI? They could claim that there is no genuine commercial purpose for the alteration and that the only reason for it is to enable one director to receive a higher dividend, commensurate with his labour.
I have heard of a case where HMRC attacked an arrangement where a husband owned A shares and his wife owned B shares and suggested (unsuccessfully, I believe) that this was an attempt by H to settle income on W. HMRC might have failed in this case, but they clearly do not like such arrangements.
I guess what I'm saying - which is what we always end up saying - is get professional advice.
NI doesn't come into this one but I know what you mean.
HMRC challenges are quite regular as in many instances there is no commercial reasoning behind the arrangement.
Where we have a situation of an investing partner and a working one that are not related parties I would happily argue the case with HMRC as directors are able to divide up the business as they see fit. It is not for HMRC to dictate corporate structures (much as I am sure that they would like to totally ignore the companies act and financial reporting standards are UK GAAP).
Of course, HMRC trying to run roughshod over small businesses is why we are here (lol, I'm feeling all noble now).
Also, being controversial here, there are instances that they are right in their approach to some business owners... But from what I have read so far I think not in the case represented by the above question.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
