New Start-Up and many questions...

[Wilsonpicket]

Good Afternoon everyone, I hope you're having a good Sunday.

I have recently formed a new ltd company as the sole director. To give you some context, it is an online, service based social enterprise. Whilst I have spent quite some time in the library and researching online, there are some remaining issues I can't seem to find easy answers for and have registered here in the hope that somebody will be able to advise.

Firstly, I have obviously spent some money starting the business and I would like to deposit a further, small lump sum into the business account. Only £500 to start is all that will be required. After the first sale I make I will be able to repay this.

• How do I go about repaying the £500 lump sum? Can I only repay this as a dividend after all tax deductions at the end of the year? Will there be issues with it appearing to be payment to myself if I do it earlier? If I make it clear in the books that it is a loan from myself to the company, will I be OK to repay myself at a later date?

Secondly, in the development of the business, I have turned to the skills and knowledge of two former colleagues to provide some resources I can't produce myself. They will be producing a fix quantity of work over a limited duration. This is almost entirely 'knowledge' based and they are simply writing a few documents. They will also retain an ongoing quality and assurance position to see that their work is implemented correctly. In return, they receive 2% of the profit for three years, a public facing bio on the 'friends' section of the website and credit for the work (though the company retains IP rights). These people still have full time employment elsewhere and are doing the work over a few days in the summer.

• Am I right in thinking that they are contractors? I am confused here because the remuneration structure is a % over time but there is no expectation that work will continue to be done. My expectation is that I can deduct their 2% from the gross profit for the tax year and pay it out to them as their contractor's fee and then they are liable for their own tax concerns. Also, in this instance, as they are working from home and using all their own resources, would I be required to have any insurance that covers them at all? They are liable for their own H&S, in this instance, yes?

Lastly, are dividends only paid at the conclusion of a tax year?


I realise this is a long list and there may well be some disagreement in the answers, so any referencing would be much appreciated.

Thank you so much to anyone in advance,

WilsonP

 

[Scalloway]

The company can repay the money that you lent it at any time that its funds permit.

If your colleagues are going to be earning any reasonable amount of money they should register as self employed and declare the income each year on their self assessment. If they don't do that there is a chance that HMRC will see them as employees and penalise you for failing to operate PAYE.

Do your colleagues contracts of employment allow them to have side jobs?

Dividends can be paid whenever sufficient profit less tax is available. You need to run management accounts and have a board minute to avoid challenge from HMRC.

 

[Alan]

1. Directors loan account. Pay £500 to the company as directors loan, pay it back in whatever chunks you like, whenever you like. Its nothing to do with dividends.

2. Bone fide contractors ( which these sound like ) don't need to be covered by your employers liability insurance. Get them to sign a contractor agreement that makes it clear they are not 'labour only' contractors.

3. Dividends can only be paid out of profit, which means in reality, normally, after the end of the COMPANY year ( not tax year) when your accounts have been made up. This is best advised by your accountant as paying more than the available profits will make the dividend illegal.

 

[Wilsonpicket]

Thank you so much to you both. I'm indebted to you!

 

[ethical PR]

If you are a social enterprise as you state in your post at least 50% of your profits are invested into your social/economic/environmental aims. The rest is invested back into the business.

My understanding is that you should be paid a salary (check with your accountant/Social Enteprise UK to see if you can pay yourself dividends) and if you are commissioning former colleagues to do work for you, you should get them to provide you with a quote/proposal and then draw up a contract/terms under which they will provide the work. Not quite sure whether you can or should be offering them profits from your business. They will then need to invoice you in line with any agreed payment terms before you pay them.

Have you got advice from someone like Social Enterprise UK - if not speak to them.

 

[Mark Ponsford]

One word of warning here with regard to "friends" being involved is that friendships can often become soured when money is involved, make sure you layout how they will be remunerated and for how long and on what parts of the business. You may ( at some point in the future) have another project and they may have an unreasonable expectation to gain 2% of that too.. I would make sure you have limits and rules on this arrangement ( do it now before any money is generated, as it becomes much more contentious when there are £/$ 's involved)

And for the £500, put it in as a director loan, in fact, anything you have purchased already out of your own pocket, use the receipts ( you can claim vat on these if you are registered) and post them on your accounts as expenses but put the payment from the director account too. You can w this down at any point in time ( funds allowing)

 

[Wilsonpicket]

Thank you for your warnings both Mark Ponsford and Ethical PR. I have already drawn up contracts which are clearly stipulating the extent to which these individuals will be remunerated but you've made me think about looking over them again!

Hi, Ethical PR. As far as I'm aware there are no legal frameworks which predicate the structure of a S.E. nor any specific practices upon which the title relies? I completely see that there are best practices in terms of how we conduct business but I incorporated as LTD by shares because I wish to retain control and I will not be seeking grants or anything similar. The business is completely self-funded by myself and the people working with me are going out on quite a limb in getting involved.

At this very early stage, when the work people are doing is based as much on faith as it is on reward, I won't be asking anyone to write a proposal... In the future, I hope we will have the opportunity to work quite differently!

 

[ethical PR]

A social enterprise is a business that makes profits like any other business. What sets them apart is what they do with their profits - reinvesting them for good.

If you are operating purely as a commercial concern, and profits are going to yourself and your former colleagues, then you shouldn't be referring to it as a social enterprise.

You said 'To give you some context, it is an online, service based social enterprise'.