Paying Directors from a start up (limited) company
Discussion
I am not an accountant, but commonly work with start up companies who are developing new technology from R&D. The following is out side of my area, but would welcome some quick advice before the accountants come back from their annual Christmas leave!
Let me give you the scenario:
1. Company is limited, 3 directors, no other staff
2. Company has not paid any of the directors so far
3. A small profit has been made - so there is some money in the pot that could be used to pay the directors for the first time - probably about £6000, so £2000 per director (leaving other money in the bank still)
4. Company may not have regular profits for a while yet, but the directors need to eat
I see that there is a 2023/24 threshold of £9100, so this could be the 'target' salary for now - meaning £758.33/month, when there is enough money in the bank to pay the directors.
Is it OK for the directors to pay themselves for December - £758.33 each, and then their accountant can sort out the PAYE for it, or must this all be set up with HMRC BEFORE any salary is taken?
Trying to help them out in a couple of ways, but not in this one!
Thanks
Let me give you the scenario:
1. Company is limited, 3 directors, no other staff
2. Company has not paid any of the directors so far
3. A small profit has been made - so there is some money in the pot that could be used to pay the directors for the first time - probably about £6000, so £2000 per director (leaving other money in the bank still)
4. Company may not have regular profits for a while yet, but the directors need to eat
I see that there is a 2023/24 threshold of £9100, so this could be the 'target' salary for now - meaning £758.33/month, when there is enough money in the bank to pay the directors.
Is it OK for the directors to pay themselves for December - £758.33 each, and then their accountant can sort out the PAYE for it, or must this all be set up with HMRC BEFORE any salary is taken?
Trying to help them out in a couple of ways, but not in this one!
Thanks
It would be easier to simply issue a dividend to each director, this wouldn't need recorded until corporation and self assessment returns are due (some time away).
Paying a salary to each director requires the company to be registered for PAYE with HMRC, and there are monthly (RTI) reporting requirements.
Paying a salary to each director requires the company to be registered for PAYE with HMRC, and there are monthly (RTI) reporting requirements.
Olivera said:
It would be easier to simply issue a dividend to each director, this wouldn't need recorded until corporation and self assessment returns are due (some time away).
Paying a salary to each director requires the company to be registered for PAYE with HMRC, and there are monthly (RTI) reporting requirements.
You can only pay dividends from distributable reserves . Paying a salary to each director requires the company to be registered for PAYE with HMRC, and there are monthly (RTI) reporting requirements.
Maybe just pay out as directors’ loans and sort out later ??
Thanks for replies so far. One further complication for dividends though.
There are 3 directors. For #1 and #2, it is their full time job, for the other director (#3), they already have a FT job elsewhere, but help out. The company was formed so the 3 directors have equal shares.
Director #3 does not want to take anything out of the company - so happy to leave their share in, but wants to see the other two get paid something as it is their main source of income.
I would think that if paying a dividend, then all 3 must be paid. Is that right?
There are 3 directors. For #1 and #2, it is their full time job, for the other director (#3), they already have a FT job elsewhere, but help out. The company was formed so the 3 directors have equal shares.
Director #3 does not want to take anything out of the company - so happy to leave their share in, but wants to see the other two get paid something as it is their main source of income.
I would think that if paying a dividend, then all 3 must be paid. Is that right?
The other thing to think about, I seem to remember that when I ran my company we always showed salaries of £12k or whatever the personal allowance were plus minimum NI contributions (which wasn’t much more), if it couldn’t be paid for any reason it was shown in the directors loan account, which meant at least you weren’t losing your annual allowances.
Don't get directors confused with shareholders. They are not always the same individuals.
Directors get remuneration (usually in the form of a salary)
Shareholders get dividends, based on the number of shares they hold and (perhaps) the class of shares they hold.
In small companies, it is common for the directors to be shareholders too, so they have the choice of being paid through salaries or dividends (or perhaps a combination of both).
If you are not a shareholder, you cannot have a dividend.
Have the directors put their own money into the business (other than to buy shares) i.e. have they put cash into the company bank account or have they bought assets and materials for the company using their own personal resources (personal bank account, credit card, own cash etc).
If they have, their "Loan Account" may be in credit and therefore they can have some money out of the company completely tax free as the payment would be treated as being a repayment of the loan the company owes to them.
Is there a shareholders' agreement in place?
Directors get remuneration (usually in the form of a salary)
Shareholders get dividends, based on the number of shares they hold and (perhaps) the class of shares they hold.
In small companies, it is common for the directors to be shareholders too, so they have the choice of being paid through salaries or dividends (or perhaps a combination of both).
If you are not a shareholder, you cannot have a dividend.
Have the directors put their own money into the business (other than to buy shares) i.e. have they put cash into the company bank account or have they bought assets and materials for the company using their own personal resources (personal bank account, credit card, own cash etc).
If they have, their "Loan Account" may be in credit and therefore they can have some money out of the company completely tax free as the payment would be treated as being a repayment of the loan the company owes to them.
Is there a shareholders' agreement in place?
TUS373 said:
Eric Mc said:
Shareholder's agreement in place?
I do not know for sure, but they will have gone with all of the model documents at time of company formation.Time and again on this page there are posts made recounting all manner of serious problems between the owners of business that could have been avoided with the presence of a properly drafted Shareholders Agreement.
This falls slightly beyond your OP but nonetheless, Eric is right to flag it up given the infancy of a business that appears to have a solid trajectory.
I can state that in over 90% of cases, a formal shareholders' agreement has never been drafted, agreed and signed between the participants.
The standard "model articles" that most small companies use do not address in any significant way disputes between shareholders etc.
You can see that already the directors are pulling in slightly different directions, with some of them urgently needing some income from the company and another happy to not withdraw anything.
The standard "model articles" that most small companies use do not address in any significant way disputes between shareholders etc.
You can see that already the directors are pulling in slightly different directions, with some of them urgently needing some income from the company and another happy to not withdraw anything.
Very true indeed Eric. I know that when I was a director of a company, we spent £30K plus in legal fees and tax advice for SEIS etc. Then again, we had significant investment from VCs, so it was a very thorough job and that company is now well on its way to an exit.
Going back to the question, agreements aside though, what are the options for paying directors from a start up, assuming all directors are in agreement (that could be documented in board meeting minutes).
I do not think a dividend is right for this first payment. It is more about providing some income for the 2 people that are working in the business rather than a dividend for everyone.
My question is the mechanics of doing it now. Can they be paid something (I am thinking two months each of £748, taking £9100/12), if so, do they need PAYE setting up before payment, or can their accountant sort this for them in their QuickBooks next week (I assume setting them up as employees that are also directors, setting up NI number, tax code for now)?
Thanks all.
Going back to the question, agreements aside though, what are the options for paying directors from a start up, assuming all directors are in agreement (that could be documented in board meeting minutes).
I do not think a dividend is right for this first payment. It is more about providing some income for the 2 people that are working in the business rather than a dividend for everyone.
My question is the mechanics of doing it now. Can they be paid something (I am thinking two months each of £748, taking £9100/12), if so, do they need PAYE setting up before payment, or can their accountant sort this for them in their QuickBooks next week (I assume setting them up as employees that are also directors, setting up NI number, tax code for now)?
Thanks all.
Talk about complicating things.
Just bung the directors that do need some money a few quid and list it as a loan. Then adjust it all out as salary once HMRC registered.
The two that are working full time should be receiving a salary anyway. Whilst the third should be happy with a divi later down the line.
Getting the cash is easy, just transfer the money. But now would be a good time for all of them to decide between them what the renumeration rules/expectations are moving forward.
Just bung the directors that do need some money a few quid and list it as a loan. Then adjust it all out as salary once HMRC registered.
The two that are working full time should be receiving a salary anyway. Whilst the third should be happy with a divi later down the line.
Getting the cash is easy, just transfer the money. But now would be a good time for all of them to decide between them what the renumeration rules/expectations are moving forward.
Eric Mc said:
I can state that in over 90% of cases, a formal shareholders' agreement has never been drafted, agreed and signed between the participants.
The standard "model articles" that most small companies use do not address in any significant way disputes between shareholders etc.
You can see that already the directors are pulling in slightly different directions, with some of them urgently needing some income from the company and another happy to not withdraw anything.
It may be the directors aren’t pulling in different directions, just that 2 are working in the business and one is not, I assume all 3 are shareholders? If you want to pay different divis to the 3 you can set up different share types, class A and B, where one is Divi paying and the other isn’t, or paying at different levels.The standard "model articles" that most small companies use do not address in any significant way disputes between shareholders etc.
You can see that already the directors are pulling in slightly different directions, with some of them urgently needing some income from the company and another happy to not withdraw anything.
TUS373 said:
Thanks Harry. That would seem the quick and easy way for now. Thanks.
Be careful with lending money to directors (or staff). There are tax rules surrounding such transactions - both under PAYE (the Beneficial Loans regulations) and Corporation Tax (Section 455 Corporation Taxes Act - https://www.gov.uk/directors-loans/you-owe-your-co...
The amounts you have mentioned are below the various thresholds but once loans start being made, especially to directors, they need to be monitored VERY carefully and repaid as quickly as possible - within a couple of months I would suggest. And definitely do not have any overdrawn directors' loan account balances in existence at the company's financial year end date.
TUS373 said:
Thanks for replies so far. One further complication for dividends though.
There are 3 directors. For #1 and #2, it is their full time job, for the other director (#3), they already have a FT job elsewhere, but help out. The company was formed so the 3 directors have equal shares.
Director #3 does not want to take anything out of the company - so happy to leave their share in, but wants to see the other two get paid something as it is their main source of income.
I would think that if paying a dividend, then all 3 must be paid. Is that right?
Fwiw the 3rd shareholder could sign a dividend waiver if you go down that route, so no, all 3 do not have to be paid.There are 3 directors. For #1 and #2, it is their full time job, for the other director (#3), they already have a FT job elsewhere, but help out. The company was formed so the 3 directors have equal shares.
Director #3 does not want to take anything out of the company - so happy to leave their share in, but wants to see the other two get paid something as it is their main source of income.
I would think that if paying a dividend, then all 3 must be paid. Is that right?
ds666 said:
Olivera said:
ds666 said:
You can only pay dividends from distributable reserves .
Yes I understand that - the OP is implying that the 6k is distributable. A 1k dividend to each director might be a reasonable starting point.Gassing Station | Business | Top of Page | What's New | My Stuff