Share Capital vs Director's Loan

[xpfoup]

Hi everyone,

In the process of setting up a limited company with one shareholder - myself - and wondering how to best invest in it.

Came across two approaches, share capital and director's loan, and would be keen to get some advice from you on which one would be sensible.

First option would be to create 1,000 shares, each with a nominal value of £10, (or 10,000 of £1 each) when the company is incorporated. I would pay these shares as soon as the business bank account is set up.

Second option would be to make a loan agreement between the company and myself (optional but preferable as far as I can tell) for a free-interest loan of £10,000 with no personal guarantee from the director. I would wire that amount as soon as the business bank account is set up.

Third option would be a mix between the two. Possibly would go 50-50, so for instance 1000 shares of £5 each, and a loan of £5,000.

The sum will be expended by my business on equipments, domain name fees, website hosting fees, and travel expenses if any. The business will be registered for Corporation Tax at the time of incorporation and I want it to claim back the VAT on all the above expenses where applicable.

A few questions:

1) Does the source of the business money (share capital or director's loan) impact on whether or not the VAT can be claimed back on a purchase?

2) The liability of shareholders is up to the aggregated value of the shares they own. Once I paid this amount to the business, am I correct in understanding that no more money could be requested from me for the payment of debts?

3) In the event the company would be liquidated, can I get back some of the personal money I would have invested by shares, or by loan?

4) In the event the company would be dissolved, can I get back some of the personal money I would have invested by shares, or by loan?

5) Aside from the above, is there anything else that would be helpful to know in order to decide on the best approach to take for investment among the three I highlighted?

Very happy to learn as well about personal experiences.

Many thanks in advance for your answers.

 

[NicoJ]

To answer the questions:

1) no

2) yes although in specific circumstances such as fraud liabilities can pass to the director

3/4) no for shares, possibly for the loan

5) do you need the money back or are you happy to leave it in the company? The most common way of getting your money back from shares is the sale of the company.

I would go for a lower share capital personally but I would have some scope to pass shares on.

Loaning the money to the company means that you have a pot of cash you can draw on tax free as and when you need it.

Shares will give your company a healthier balance sheet in the initial start up phase but are difficult to redeem later down the line (but not impossible).

 

[Heyes]

If the company is to be 'just you', then do a single £1 share and put in the £10k as a director loan.

 

[Mark T Jones]

I'd mostly agree with the above, unless you have significant plans re investment and significant growth.

The significance of shares is largely to create a strong balance sheet, which is pretty much irrelevant to you, the owner, but will make the business look stronger to interested parties.

That said, it's pretty easy to make that change at the time.

 

[xpfoup]

@NicoJ Thanks for your answers, this is very helpful.

Loaning the money to the company means that you have a pot of cash you can draw on tax free as and when you need it.

Could you please expand on this? Am I correct to understand that in the alternative some tax would need to be payed by the company on the shares sold to me at incorporation time?

5) do you need the money back or are you happy to leave it in the company? The most common way of getting your money back from shares is the sale of the company.

Happy to leave the money in the company. Hadn't considered a sale, that is a good point.

Missed a relevant element for the context of that last question 5), apologies. I will eventually need to get investors on board and secure funding, it feels that having part of the money as share capital would indeed be beneficial in this scenario. Do you see other elements to consider to make a decision on the share capital / loan ratio?

 

[xpfoup]

@Heyes Thank you.

If the company is to be 'just you', then do a single £1 share and put in the £10k as a director loan.

Forgot to mention an important point with regards to the last question, apologies.

Will need to get some external investors and secure funding. This was in part my reasoning to have a higher number of shares.

Seems then that at least some initial investment from me should come from share capital. Would you know of any other elements to consider to make a decision on the share capital / loan ratio?

 

[xpfoup]

@Mark T Jones Thanks for your answer.

I'd mostly agree with the above, unless you have significant plans re investment and significant growth.

That is it, I will need to get investors on board and secure funding eventually. Forgot mentioning this element in my OP, apologies.

I understand then from your answer that money from share capital would be more attractive to interested parties.

Are there any other elements you think I should consider in order to decide on the ratio capital share/loan for my initial investment?

 

[Heyes]

@Heyes Thank you.
Will need to get some external investors and secure funding. This was in part my reasoning to have a higher number of shares.

Seems then that at least some initial investment from me should come from share capital. Would you know of any other elements to consider to make a decision on the share capital / loan ratio?

Thanks.

You can issue more shares later, but 100 ought to be sufficient.

Whether you've put in £1 or £10k is unlikely to make much difference with savvy investors or loan source... far more important is you, the concept/product/service, trading results.

Balance sheets are over-rated. And, it can be strengthened later should that be considered necessary.

Putting in the money as a director loan enables you to easily get it out should you want to.

I think I remember you asking in a different post something about tax on initial shares... I may have knowledge gaps but I'm not aware of any circumstance in which tax would be due on subscriber shares.

I do suggest you find and engage a decent accountant (not a book-keeper, or tax return filer), sooner rather than later. Half an hour of question/answer/suggestion ought to be well worthwhile.

 

[Mark T Jones]

@Mark T Jones Thanks for your answer.



That is it, I will need to get investors on board and secure funding eventually. Forgot mentioning this element in my OP, apologies.

I understand then from your answer that money from share capital would be more attractive to interested parties.

Are there any other elements you think I should consider in order to decide on the ratio capital share/loan for my initial investment?

You will presumably (hopefully) be taking good professional advice before seeking equity - in reality this will be low down the list of things to worry about.

Far more important is to structure the business operationally in a way that will be attractive to investors