Bringing on a new Director

[SPA Recruitment]

Hi All.

I have been in business for just under a year.

I am the sole Director in my limited company, but I am due to introduce a new Director (50 - 50 Split) In mid-November.

I currently have a bank balance of £150k and my accountant has put through something for the Corporation tax I’m due to pay next year.


This has left me with a balance of £110k on my balance sheet.


When the new Director comes on in a few weeks, but I don’t want him to be entitled to half the money in the account.


My accountant has said that I will need to “sell” him half the company, but the new director doesn’t have the money to pay for half the business (£55k). My accountant said he will open a Director's loan account which will be reduced every time a Dividend is declared. So if we pay out £30k in Dividends it will be split between me (£15k) the new director (£5k) and the money owed in his director's loan account (£10k).


The accountant has said that once the original amount is paid off I would have received £90k in dividends and the other director ould have received £35k, so I would have been paid the £55k owing for my original share of the profit. We would then be true 50/50 partners in the Limited company.

He will be producing just as much profit, if not more than me so I don't want there to be any issues in the future.

I wanted to take my money out of the business to avoid this but taking it out in dividend will attract a lot of tax and having a director’s loan will attract a benefit.


Is my accountant right or can you suggest anything?

 

[Scalloway]

A director is not entitled to any share of a company's assets. A shareholder would be though. Are you planning to let the new director hold shares in your company?

 

[NickGrogan]

I am due to introduce a new Director (50 - 50 Split) In mid-November.

Why a new director, not an employee and why are you giving him 50% of the shares?

When the new Director comes on in a few weeks, but I don’t want him to be entitled to half the money in the account.

Isn't that what 50/50 means?

He will be producing just as much profit, if not more than me so I don't want there to be any issues in the future.

You are building a big pile of issues right now. Have you thought about what you actually want to achieve?

 

[SPA Recruitment]

Hi all.

I started the business as the only worker, doing all the work and now I am bringing on someone who will be doing as much work as me as a 50-50 partner.

We will be CoDirectors and 50-50 shares.

I don't want the new director being able to draw down on the profit that the business made before he joined.

I want to share the future profit with him but not the historical profit.

Am I able to take all my money out before bringing him on?

Can that work or does the suggestion form the accountant (sell the £55k share and reduce his Dividends for the next year until it has been paid back)

 

[NickGrogan]

We will be CoDirectors and 50-50 shares.

This is the first bad idea

I don't want the new director being able to draw down on the profit that the business made before he joined.

If he is a 50% shareholder and director how do you plan to stop him?

I want to share the future profit with him but not the historical profit.

Then dont make him a 50% shareholder.

What will you do if he works for you for a week, decides he doesn't like it, leaves for a new job and then claims 50% of all future dividends?

What do you have in place to stop this?

Why do you want him to be a director and not an employee?
Why a shareholder and not paid a bonus based on performance?

 

[SPA Recruitment]

We have worked together and I want to pay him in Dividends and not through PAYE exclusively.

Once he is up and running, he will be bringing in more profit than me.

I want us to both benefit from our future work together.

 

[Mr D]

Right so as a shareholder he can block anything in a shareholder vote and as a director he can block any decisions directors make.
Sure you want to make him a director?

It sounds like you want an employee.

Also sounds like you have valued your business at the same amount as the bank account holds. Does he value it the same way?

 

[Mr D]

We have worked together and I want to pay him in Dividends and not through PAYE exclusively.

Once he is up and running, he will be bringing in more profit than me.

I want us to both benefit from our future work together.

Shareholders get dividends.
And they don't need to work for the company.

You want him to benefit from your future work together? Then provide a profit share scheme or bonus.
Giving half the business away and making it so you'd have to buy the half from him if he left...? or pay him half of dividends for rest of his life?

 

[TheCyclingProgrammer]

As others have said, if you make him a 50/50 shareholder and assuming you both have the same class of shares, then he will be entitled to 50% of any profits and all dividends.

Of course you don't want them to have something for nothing, which is why you really need to be thinking about getting your company valued (it's not necessarily whatever your retained profits are - it may have other assets and goodwill besides cash) and selling half of your shares to the other director for a reasonable market value.

 

[UK Contractor Accountant]

Or simply just park the company and start a new company with a Shareholders Agreement in place.

 

[Nick Garnett]

Sorry, but this sounds like a recipe for disaster

 

[Newchodge]

Whatever you do you MUST get a shareholder's agreement in place covering all the issues you are likely to face. You need that drawn up by an expert and you need it in place from the moment they get their hands on half of the business.

 

[Nick Garnett]

Sorry, but sounds like the horse has bolted already and you need to get some help to minimise the damage.

 

[antropy]

If you are worried about the profit-sharing now and he hasn't joined yet, it will only get worse when he joins. As highlighted above it sounds like you want him to be an employee. not a director. I think you need to seriously look at why you are bringing them on as a director as it doesn't fit with what you are explaining? Alex

 

[NickGrogan]

We have worked together and I want to pay him in Dividends and not through PAYE exclusively.

Once he is up and running, he will be bringing in more profit than me.

I want us to both benefit from our future work together.

If your accountant hasn't said stop, this is a really stupid idea, you need a new accountant.

You are doing so many things wrong.

There are much better ways of doing this, happy to talk via PM if you prefer.

 

[Lisa Thomas]

I haven't read all the replies so apologies if I am repeating something but you don't seem to understand the difference between Director and Shareholder.

 

[antropy]

It sounds like he wants to pay less tax via dividends, which is fair enough but don't share your £150k if he doesn't even have £55k.

Either:

1. Start a new company for the two of you, as described above.
2. Get him to start his own limited company and invoice your company for the work you do together and he can then pay himself however he likes.

Paul.

 

[The Byre]

Sorry, but this sounds like a recipe for disaster

I could hardly agree more! Diluting your ownership is madness on a stick and a 50:50 split is the perfect structure for future strife and the usual outcome is the destruction of the company! This forum is bursting with tales of woe from numpties that went into 50:50 partnerships and are either about to lose everything or have lost everything.

you don't seem to understand the difference between Director and Shareholder.

The same golden thought occurred to me.

Once he is up and running, he will be bringing in more profit than me.

Now that's what Americans call "Whistling Dixie!"

It sounds like you want an employee.

This!

Structure the employment so that his work becomes a profit-island either within the company or as a separate entity.

Get him to start his own limited company and invoice your company for the work you do together and he can then pay himself however he likes.

And that is how it is done. And if he is working out of the same office, charge rent and also levy a set small amount for the use of the name and business contacts.

 

[Chris Ashdown]

In the first few months all will be rosy, then at 50/50 one of you will have a different point of view and the other disagree, what happens then, you gave the other person half of the company so nothing happens as you both own half and nobody can have the casting vote

It does not work out he leaves and stops getting paid but still owned his half of the company and gets half of the dividends and does not have to sell to you his half and could also sell it to somebody else without your agreement

Why not make him a director after a year working together and sell him say 25% of the shares with a shareholders agreement that when or if he leaves he has to return the shares at a agreed price based upon the current balance sheet of the business, agreed by a independent accountant. at the absolute a 50/49 split in your favour

Whilst shares are of little value at this time they may well be needed and very worth while at a later date, never give them away sell them if required maybe by stage payments so he can afford say £50 today he can buy 5% of the shares and so on until you get to either your limit or 49%

Without you ha could never start his own company, you invested and made it happen so dont give your hard work away

 

[STDFR33]

at the absolute a 50/49 split in your favour

Can I have the remaining 1%?

 

[Chris Ashdown]

oops should read 51% not 50